<PAGE>

                  SECURITIES AND EXCHANGE COMMISSION
                        WASHINGTON, D.C. 20549

                              FORM 10-Q

[X]   QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the Quarter Ended March 31, 2002

[_]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

            For the transition period from ____________ to ______________
                           Commission File number 000-26287

                                 Axeda Systems Inc.
                  (Exact Name of Registrant as Specified in Its Charter)

                        Delaware                               23-2763854
             (State or other jurisdiction of                (I.R.S. Employer
             incorporation or organization)               Identification Number)

                                    257 Great Valley Parkway
                                   Malvern, Pennsylvania 19355

                                  -----------------------------

                             (Address of Principal Executive Offices)
              Registrant's Telephone Number, Including Area Code: (800) 700-0362

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                          Yes X No
                                     -------------------

On May 13, 2002, 26,850,086 shares of the Registrant's Common Stock, $.001 par
value, were outstanding.

--------------------------------------------------------------------------------
<PAGE>

                               AXEDA SYSTEMS INC.

                                    FORM 10-Q
                          QUARTER ENDED MARCH 31, 2002

                                      INDEX

<TABLE>
<CAPTION>
                                                                                                               Page
<S>              <C>                                                                                           <C>
Part I           Financial Information

Item 1           Financial Statements

                 Consolidated Balance Sheets at March 31, 2002 (unaudited) and December 31, 2001               2

                 Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001      3
                 (unaudited).

                 Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001      4
                 (unaudited).

                 Notes to Consolidated Financial Statements                                                    5

Item 2           Management's Discussion and Analysis of Financial Condition and Results of Operations        25

Item 3           Quantitative and Qualitative Disclosures About Market Risk                                   43

Part II          Other Information

Item 1           Legal Proceedings                                                                            61

Item 2           Changes in Securities                                                                        62

Item 3           Defaults Upon Senior Securities                                                              62

Item 4           Submission of Matters to a Vote of Security Holders                                          62

Item 5           Other Information                                                                            62

Item 6           Exhibits and Reports on Form 8-K                                                             64
</TABLE>
--------------------------------------------------------------------------------


1
<PAGE>


                              AXEDA SYSTEMS INC.
                         CONSOLIDATED BALANCE SHEETS
                (In thousands, except share and per share data)

<TABLE>
<CAPTION>
PART I
ITEM 1: FINANCIAL STATEMENTS
                                                                                    March 31,         December 31,
                                                                                      2002                2001
                                                                                 -----------------  ----------------
                                                                                   (unaudited)
<S>                                                                                    <C>            <C>
ASSETS
Current assets:

    Cash and cash equivalents, including restricted cash of  $1,399 in 2002
    and $2,549 in 2001........................................................         $    36,450      $   47,349
    Accounts receivable, net of provision for doubtful accounts of $224 in
    2002 and $179 in 2001.....................................................               4,708           4,623
    Inventories, net..........................................................                 284           2,070
    Prepaid expenses..........................................................               1,025             934
    Loans receivable - officers, net .........................................                   -              34
    Other current assets......................................................                  99             685
                                                                                   ---------------   -------------
        Total current assets..................................................              42,566          55,695

    Furniture and equipment, net..............................................               2,537           2,567
    Goodwill..................................................................              20,787          20,819
    Identified intangible assets, net of accumulated amortization of $787 in
    2002 and $192 in 2001.....................................................               8,958           9,553
    Other assets .............................................................                 522             472
                                                                                   ---------------   -------------
        Total assets..........................................................         $    75,370       $  89,106
                                                                                   ===============   =============

 LIABILITIES AND STOCKHOLDERS' EQUITY
 Current liabilities:
    Current portion of notes payable..........................................         $       387       $   2,149
    Accounts payable..........................................................               4,778           5,047
    Accrued expenses .........................................................               6,308           8,928
    Income taxes payable......................................................                 407           1,075
    Deferred revenue..........................................................                 758             926
                                                                                   ---------------   -------------
        Total current liabilities.............................................              12,638          18,125

 Non-current liabilities:
    Notes payable, less current portion.......................................                 198             187
    Other non-current liabilities.............................................               1,406           1,428
                                                                                   ---------------   -------------
      Total liabilities......................................................               14,242          19,740

 Commitments and contingencies (note 12)                                                         -               -

 Stockholders' equity:
    Preferred stock, $.001 par value; 5,000,000 shares authorized in 2002 and
    2001, none issued or outstanding..........................................                   -               -
    Common stock, $.001 par value 50,000,000 authorized; 27,406,600 shares
    issued in 2002 and 27,274,962 in 2001.....................................                  27              27
    Additional paid-in capital................................................             143,764         143,454
    Deferred stock compensation...............................................             (1,194)         (1,842)
    Accumulated deficit.......................................................            (80,064)        (70,953)
    Accumulated other comprehensive income (loss).............................                (64)              21
    Treasury stock at cost, 583,800 shares in 2002 and 2001...................             (1,341)         (1,341)
                                                                                   ---------------   -------------

        Total stockholders' equity............................................              61,128          69,366
                                                                                   ---------------   -------------
        Total liabilities and stockholders' equity............................            $ 75,370        $ 89,106
                                                                                   ===============   =============
</TABLE>

         See accompanying notes to consolidated financial statements.


2
<PAGE>

                              AXEDA SYSTEMS INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                   Three Months Ended March 31,
                                                                                     2002                2001
                                                                              ------------------- -------------------
                                                                                 (unaudited)         (unaudited)
<S>                                                                                     <C>             <C>
Revenues:
    License..................................................                               $3,040          $2,363
    Services and maintenance...................................................                543             407
       Hardware.......................................................                       1,057              46
                                                                                   ---------------   -------------

Total revenues........................................................                       4,640           2,816
                                                                                   ---------------   -------------

Cost of revenues:
    License..................................................                                1,035             523
    Services and maintenance..........................................                         717              94
    Hardware..........................................................                       1,009              37
     Software amortization.....................................................                529               -
                                                                                   ---------------   -------------

Total cost of revenues................................................                       3,290             654
                                                                                   ---------------   -------------

Gross profit..........................................................                       1,350           2,162

Research and development
    Non-cash compensation.............................................                          64           1,738
    Other research and development expense................................                   2,232           2,407
Sales and marketing
    Non-cash compensation...........................                                            19              69
    Other selling and marketing expense.................................                     4,802           3,492
General and administrative
    Non-cash compensation.............................................                         860              64
    Other general and administrative expense..........................                       3,018           2,289
    Provision for doubtful accounts..............................                               45             126
Depreciation and amortization.........................................                         310           1,666
                                                                                   ---------------   -------------
        Operating loss.....................................                               (10,000)         (9,689)

Gain on sales of assets..................................                                        -          52,037
Interest (income) expense, net and other (income) expense, net.................              (220)           (366)
                                                                                   ---------------   -------------

Income (loss) before provision for income taxes (benefit).................                 (9,780)          42,714

     Provision for income taxes (benefit).............................                       (668)           2,979
                                                                                   ---------------   -------------

Net income (loss)..............................................                          $ (9,112)        $ 39,735
                                                                                   ===============   =============
Basic net income (loss) per weighted average common share outstanding....                 $ (0.34)          $ 2.28
                                                                                   ===============   =============
Diluted net income (loss) per weighted average common share outstanding....               $ (0.34)          $ 2.14
                                                                                   ===============   =============
Weighted average number of common shares outstanding used in calculation of
basic net income (loss) per common share...............                                 26,789,174      17,415,045
                                                                                   ===============   =============
Weighted average number of common shares outstanding used in calculation of
diluted net income (loss) per common share...............                               26,789,174      18,582,846
                                                                                   ===============   =============
</TABLE>

         See accompanying notes to consolidated financial statements.

3
<PAGE>

                              AXEDA SYSTEMS INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)

<TABLE>
<CAPTION>
                                                                                     Three Months Ended March 31,
                                                                                 -----------------------------------
                                                                                        2002               2001
                                                                                 ------------------- ---------------
                                                                                    (unaudited)         (unaudited)
<S>                                                                                       <C>             <C>
Cash flows from operating activities:
  Net income (loss)..............................................                         $(9,112)        $ 39,735
  Adjustments to reconcile net income (loss) to net cash used in operating
  activities:
    Depreciation and amortization                                                              839           1,666
    Gain on sales of assets..........................                                            -        (52,037)
    Non-cash compensation and other expenses...........................................        943           1,438
    Deferred income taxes                                                                        -             564
    Provision for doubtful accounts.............................                                45               -

  Changes in items affecting operations (excluding the effects of acquisitions
  and divestitures):
    Accounts receivable............................................                          (130)           1,442
    Inventories........................................................                      1,786         (1,995)
    Loan receivable--officer.......................................                             34              36
    Prepaid expenses and other current assets..........................                        495           (522)
    Goodwill, other assets and intangible assets............................                  (18)         (1,522)
    Accounts payable                                                                         (269)         (1,536)
    Accrued expenses and other non-current liabilities.......                              (2,629)           1,478
    Income taxes payable...........................................                          (668)           2,931
    Deferred revenue                                                                         (168)             298
                                                                                   ---------------   -------------
Net cash used in operating activities                                                      (8,852)         (8,024)
                                                                                   ---------------   -------------

Cash flows from investing activities:
  Capital expenditures                                                                       (223)           (166)
  Net proceeds from sales of assets......................                                        -          68,112
                                                                                   ---------------   -------------
Net cash provided by (used in) investing activities    .............                         (223)          67,946
                                                                                   ---------------   -------------

Cash flows from financing activities:
  Net proceeds from exercise of stock options and warrants                                       3               3
  Repayments of long-term debt................................                             (1,751)               -
                                                                                   ---------------   -------------
Net cash provided by (used in) financing activities                                        (1,748)               3
                                                                                   ---------------   -------------

Effect of exchange rate changes on cash and cash equivalents                                  (76)              19
                                                                                   ---------------   -------------

Net increase (decrease) in cash and cash equivalents                                      (10,899)          59,944
Cash and cash equivalents:
  Beginning of period                                                                       47,349           9,615
                                                                                   ---------------   -------------
  End of period                                                                            $36,450         $69,559
                                                                                   ===============   =============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
    Interest.........................................................                        $  40            $  1
    Income taxes..........                                                                       -               -
</TABLE>

         See accompanying notes to consolidated financial statements.

4
<PAGE>

                         AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Information with respect to March 31, 2002 and 2001 is unaudited)

1)   Summary of Significant Accounting Policies

     a)  Description of Business (note 6 and note 7)

         Axeda Systems Inc. ("the Company" or "Axeda"), which changed its name
         from RAVISENT Technologies Inc. in January 2002, develops, markets and
         sells software products and technologies used by multiple industries
         and customers worldwide for Device Relationship Management ("DRM")
         Systems, data visualization, data acquisition and control and
         communication through the Internet. The Company distributes its DRM
         products through direct sales to original equipment manufacturers
         ("OEM's") and enterprise customers, as well as through distributors and
         value-added resellers. The Company maintains regional sales and support
         offices for DRM in the United States, Japan, France, Israel and the
         Netherlands.

         The Company also designs, develops, licenses and markets core-based
         modular software solutions that enable digital video and audio stream
         management in personal computer ("PC") systems. In March 2001, the
         Company sold the assets of its consumer electronics ("CE") and Internet
         appliance ("IA") businesses (note 7). The Company's PC solutions enable
         decoding (playback) and encoding (recording) of multimedia formats such
         as digital versatile disk ("DVD"); direct broadcast satellite ("DBS")
         and high-definition television ("HDTV") on existing personal computers.
         The Company's customers for its digital video products consist
         principally of PC manufacturers.

         During the quarter ended March 31, 2002, the Company's revenues were
         substantially generated from selling DRM solutions, digital video
         solutions to PC OEMs and inventories. During 2001 the Company's
         revenues were substantially generated from selling digital video
         solutions and IA devices to PC, CE, and IA OEM's. In December 2001 the
         Company purchased all of the outstanding capital stock of eMation,
         Ltd., a private company organized under the laws of the State of Israel
         and headquartered near Boston, Massachusetts, for the purpose of
         acquiring a company with greater opportunity than its existing product
         line. As a result of the acquisition, the Company is a provider of DRM
         solutions. See note 6-Acquisition for the description and accounting
         for the acquisition of eMation.

         The Company has sustained significant operating losses and negative
         cash flows from operations since its inception. For the quarters ended
         March 31, 2002 and 2001, the Company's net losses excluding gains on
         sales of assets, were $9.1 million and $12.3 million, respectively. The
         Company plans on investing heavily in product development and sales and
         marketing. There can be no assurances that the Company will be able to
         generate sufficient revenues necessary to achieve or sustain
         profitability in the short or long term. However, management believes
         that the current cash and cash equivalent amounts will be sufficient to
         sustain the Company's operations through 2003.

     b)  Basis of Presentation

         The interim consolidated financial statements of the Company for the
         three months ended March 31, 2002 and 2001 included herein have been
         prepared by the Company, without audit, pursuant to the rules and
         regulations of the Securities and Exchange Commission ("SEC"). Certain
         information and footnote disclosures normally included in financial
         statements prepared in accordance with accounting principles generally
         accepted in the United States have been condensed or omitted

5
<PAGE>

                              AXEDA SYSTEMS INC.
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

          pursuant to such rules and regulations relating to interim financial
         statements. In the opinion of management, the accompanying unaudited
         interim consolidated financial statements reflect all adjustments
         consisting only of normal recurring items, as well as the accounting
         changes to adopt SFAS 141, "Business Combinations," and SFAS 142,
         "Goodwill and Other Intangible Assets," necessary to present fairly the
         financial position of the Company at March 31, 2002 and 2001 and the
         results of its operations and cash flows for the three months ended
         March 31, 2002 and 2001. The unaudited consolidated financial
         statements included in this Form 10-Q should be read in conjunction
         with the audited consolidated financial statements and notes thereto,
         included in the Company's Form 10-K for the year ended December 31,
         2001. The interim results presented are not necessarily indicative of
         results for any subsequent quarter or for the year ending December 31,
         2002.

     c)  Principles of Consolidation

         The consolidated financial statements include the financial statements
         of the Company and its wholly owned subsidiaries. All significant
         intercompany balances and transactions have been eliminated in
         consolidation.

     d)  Cash and Cash Equivalents

         For purposes of the statement of cash flows, the Company considers all
         highly liquid instruments purchased with an original maturity of three
         months or less to be cash equivalents.

     e)  Revenue Recognition

         In 2001, the Company's primary revenue categories consisted of:
         software licenses for PC and CE products, including DVD; IA products,
         including Internet browser software and hardware reference designs;
         services for PC, CE and IA products, including non-recurring
         engineering customization and development services; and hardware for PC
         products, primarily DVD boards and IA products, including Internet
         set-top boxes, and integrated circuit boards (note 7). Since December
         2001, the Company licenses its DRM system products to customers in the
         industrial, building automation, technology, medical instrumentation
         and office and semiconductor equipment industries (note 6).

         The Company recognizes software revenues in accordance with the
         American Institute of Certified Public Accountants' ("AICPA") Statement
         of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), as
         amended by SOP 98-9, "Modification of SOP 97-2, Software Revenue
         Recognition, With Respect to Certain Transactions" ("SOP 98-9").
         License revenues are recognized in the period in which the license
         agreement is signed, the fee is fixed and determinable, delivery of the
         technology has occurred requiring no significant production
         modification or customization and collectibility is probable. Royalties
         representing software license fees paid on a per unit basis are
         recognized when earned, which is generally based on receiving
         notification from licensees stating the number of products sold which
         incorporate the licensed technology from the Company and for which
         license fees, based on a per unit basis, are due. The terms of the
         license agreements generally require the licensees to give notification
         to the Company within 15

6
<PAGE>

                              AXEDA SYSTEMS INC.
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         to 30 days of the end of the quarter during which the sales of the
         licensees' products take place. In a number of cases, the revenue
         recorded by the Company will occur in the quarter following the sale
         of the licensee's products to its customers.

         For software arrangements that include multiple elements, SOP 97-2
         requires the Company to allocate the fee to the individual elements
         based on vendor-specific objective evidence of fair value ("VSOE"),
         regardless of the prices stated within the contract. VSOE is limited to
         the price charged when the element is sold separately or, for an
         element that is not yet sold separately, the price established by
         management having the relevant authority. When there is VSOE for the
         undelivered elements in multiple-element arrangements that are not
         accounted for using contract accounting, the Company allocates revenue
         to the delivered elements of the arrangement using the residual value
         method. Therefore, the Company defers revenues from the arrangement fee
         equal to the fair value of the undelivered elements and the difference
         between the total arrangement fee and the amount deferred for the
         undelivered elements is recognized as revenue related to the delivered
         elements. The fair value of maintenance and postcontract customer
         support ("PCS") obligations are based upon separate sales of renewals
         to other customers or upon renewal rates quoted in the contracts. The
         fair value of services, such as training or consulting, is based upon
         separate sales by the Company of these services to other customers.

         When VSOE does not exist to allocate revenue to each of the various
         elements of an arrangement and revenue cannot be allocated using the
         residual value method, the entire fee from the arrangement is deferred
         until the earlier of the establishment of VSOE or the delivery of all
         the elements of the arrangement. In cases where a license grants a
         customer unspecified upgrade rights, the license fee is deferred and
         recognized ratably over the term of the arrangement. Billed amounts due
         from the customers in excess of revenue recognized are recorded as
         deferred revenue.

         Hardware revenues are recognized upon shipment of products to
         customers. The Company's sales to original equipment manufacturers do
         not provide a right of return unless in the event of manufacturing
         defect, which is the responsibility of the Company's third party
         contract manufacturers. For hardware transactions where no software is
         involved, the Company applies the provisions of Staff Accounting
         Bulletin 101 "Revenue Recognition" ("SAB 101") issued by the U.S.
         Securities and Exchange Commission ("SEC").

         The Company recognizes revenue for maintenance services ratably over
         the contract term. The Company's training and consulting services are
         billed based on hourly rates or fixed fees, and the Company generally
         recognizes revenue as these services are performed.

         The Company recognizes services revenues in accordance with the
         provisions of AICPA Statement of Position 81-1, "Accounting for
         Performance of Construction-Type and Certain Production-Type Contracts"
         ("SOP 81-1"). Revenues related to services are recognized upon delivery
         of the service in the case of time and material contracts. Revenues
         related to development contracts involving significant modification or
         customization of hardware or software under development arrangements
         are recognized using the percentage-of-completion method, based on the
         efforts-expended method or

7
<PAGE>

                              AXEDA SYSTEMS INC.
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         based on performance milestones specified in the contract where such
         milestones fairly reflect progress toward contract completion. For
         software license arrangements that include services requiring
         significant modification or customization of the licensed software,
         the Company applies the percentage-of-completion method of contract
         accounting to the entire arrangement. Losses on contracts are
         recognized for the entire anticipated loss, if any, soon as the loss
         becomes evident.

     f)  Use of Estimates

         The preparation of financial statements in conformity with accounting
         principles generally accepted in the United States of America requires
         management to make estimates and assumptions that affect the reported
         amounts of assets and liabilities and disclosure of contingent assets
         and liabilities at the date of the financial statements and the
         reported amounts of revenues and expenses during the reporting period.
         On an ongoing basis, the Company evaluates its estimates, including
         those related to revenue recognition, provision for doubtful accounts
         and returns, fair value of acquired intangible assets and goodwill,
         useful lives of intangible assets and property and equipment, income
         taxes, and contingencies and litigation, among others. The Company
         bases its estimates on historical experience and on various other
         assumptions that are believed to be reasonable under the circumstances,
         the results of which form the basis for making judgments about the
         carrying values of assets and liabilities that are not readily apparent
         from other sources. Actual results could differ from the estimates made
         by management with respect to these items and other items that require
         management's estimates.

     g)  Foreign Currency Translation

         The Company considers the functional currency of its foreign
         subsidiaries to be the local currency, and accordingly, the foreign
         currency is translated into U.S. dollars using exchange rates in effect
         at period end for assets and liabilities and average exchange rates
         during each reporting period for the results of operations. Adjustments
         resulting from translation of foreign subsidiary financial statements
         are reported in accumulated other comprehensive income (loss). Gains or
         losses on foreign currency transactions are recognized in current
         operations and have not been significant to the Company's operating
         results in any period presented.

     h)  Inventories

         Inventories are valued at the lower of cost or market. Cost is
         determined using the first-in, first-out method ("FIFO"). Inventory is
         net of reserves of approximately $7.2 million and $21.3 million at
         March 31, 2002 and December 31, 2001, respectively.

     i)  Computer Software Costs

         Computer software costs consist of purchased software capitalized under
         the provisions of Statement of Financial Accounting Standards No. 86,
         "Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS
         86"). Amortization of capitalized software costs is computed on a
         straight-line basis over the estimated economic life of the product or
         on a basis using the ratio of current revenue to the total of current
         and anticipated future revenue, whichever is greater, and included in
         cost of revenues in the accompanying

8
<PAGE>

                              AXEDA SYSTEMS INC.
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         statement of operations. To date, no internally developed software
         costs have been capitalized. All other research and development
         expenditures are charged to research and development expense in the
         period incurred.

     j)  Computation of Net Income (Loss) Per Share

         The Company computes earnings per share in accordance with SFAS No.
         128, "Computation of Earnings Per Share" ("SFAS 128"). In accordance
         with SFAS 128, basic earnings per share is computed using the weighted
         average number of common shares outstanding during the period. Diluted
         earnings per share is computed using the weighted average number of
         common and dilutive common equivalent shares outstanding during the
         period. Common equivalent shares consist of the incremental common
         shares issuable upon the exercise of stock options and warrants (using
         the treasury stock method), and the incremental common shares issuable
         upon the conversion of the convertible preferred stock (using the if-
         converted method). Common equivalent shares are excluded from the
         calculation if their effect is anti-dilutive.

         The following is a reconciliation of the numerators and denominators of
         the basic and diluted EPS computations for net income (in thousands,
         except per share data):

         i)   Three Months Ended March 31, 2002

              Options to purchase approximately 4.7 million shares of common
              stock with a weighted-average exercise price of $2.50 were
              outstanding during the three months ended March 31, 2002 but were
              not included in the computation of diluted EPS because the effects
              of assumed conversion or exercise would have an anti-dilutive
              effect on EPS. The outstanding options include 1.7 million options
              that are exercisable, with a weighted average exercise price of
              $3.32, of which 1.3 million are vested and exercisable, with a
              weighted average exercise price of $1.25. The options have various
              expiration dates during the next 10 years.

              Warrants to purchase approximately 0.5 million shares of common
              stock with a weighted-average exercise price of $3.20 were
              outstanding during the three months ended March 31, 2002, but were
              not included in the calculation of diluted EPS because the effects
              of assumed conversion or exercise would have an anti-dilutive
              effect on EPS. The warrants are fully vested and have various
              expiration dates during the next 5 years.

9
<PAGE>

                              AXEDA SYSTEMS INC.
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         ii)  Three Months Ended March 31, 2001

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
                           For the Three Months Ended March 31, 2001
                             (in thousands, except per share data)
------------------------------------------------------------------------------------------------
                                                     Income           Shares         Per-Share
                                                  (Numerator)      (Denominator)      Amount
                                                  -----------      -------------      ------
------------------------------------------------------------------------------------------------
<S>                                                    <C>                  <C>          <C>
Net income available to common stockholders            $ 39,735
------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------
Basic EPS
------------------------------------------------------------------------------------------------
    Net income available to common stockholders          39,735             17,415       $ 2.28
                                                         ------             ------       ------
------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------
Effect of Dilutive Securities
------------------------------------------------------------------------------------------------
Warrants                                                      -                224
------------------------------------------------------------------------------------------------
Outstanding options                                           -                663
------------------------------------------------------------------------------------------------
Contingently issuable shares                                  -                281
                                                              -                ---
------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------
Diluted EPS                                                                      -            -
------------------------------------------------------------------------------------------------
    Net income available to common
    stockholders and assumed conversions               $ 39,735             18,583       $ 2.14
                                                       --------             ------       ------
------------------------------------------------------------------------------------------------
</TABLE>

         Options to purchase approximately 1.2 million shares of common stock at
         various exercise prices were outstanding during the three months ended
         March 31, 2001 but were not included in the computation of diluted EPS
         because the corresponding exercise prices of the options were greater
         than the average market price of the common shares and are therefore
         anti-dilutive. The options have various expiration dates during the
         next 10 years.

     k)  Stock Options

         The Company accounts for its employee stock-based compensation plans
         using the intrinsic value method. As such, deferred compensation is
         recorded on the date of grant if the current market price of the
         underlying stock exceeds the exercise price. The Company records and
         measures deferred compensation for options granted to non-employees at
         their fair value. Deferred compensation is expensed over the vesting
         period of the stock option.

     l)  Intangible Assets and Goodwill

         In July 2001, the Financial Accounting Standards Board ("FASB") issued
         SFAS No. 141,

10
<PAGE>

                              AXEDA SYSTEMS INC.
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         "Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and
         Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that the
         purchase method of accounting be used for all business combinations.
         SFAS 141 also specifies criteria that intangible assets acquired in a
         purchase method business combination must meet to be recognized and
         reported apart from goodwill, noting that any purchase price allocable
         to an assembled workforce must be recognized and reported in goodwill.
         SFAS 142, which was effective January 1, 2002, requires that intangible
         assets with indefinite useful lives should not be amortized until their
         lives are determined to be finite and all other intangible assets with
         finite lives must be amortized over their useful lives to their
         estimated residual values. SFAS 142 also requires that goodwill not be
         amortized, but instead be tested for impairment in accordance with the
         provisions of SFAS 142 at least annually or between annual tests upon
         the occurrence of certain events or upon certain changes in
         circumstances. Intangible assets with finite useful lives are reviewed
         for impairment in accordance with SFAS No. 144, "Accounting for the
         Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). See
         "Impairment of Long-lived Assets," below.

         The Company adopted SFAS 141 in 2001. Effective July 1, 2001, the
         Company adopted certain provisions of SFAS 142, as required in the
         transition guidance contained therein, and adopted the remaining
         provisions on January 1, 2002. There was not a cumulative transition
         adjustment upon adoption as of July 1, 2001 or January 1, 2002. SFAS
         141 and SFAS 142 required the Company to perform the following as of
         January 1, 2002: (i) review goodwill and intangible assets for possible
         reclassifications; (ii) reassess the lives of intangible assets; and
         (iii) perform a transitional goodwill impairment test. The Company has
         reviewed the balances of goodwill and identifiable intangibles and
         determined that the Company does not have any amounts that are required
         to be reclassified from goodwill to identifiable intangible assets, or
         vice versa. The Company has also reviewed the useful lives of its
         identifiable intangible assets and determined that the original
         estimated useful lives remain appropriate. The Company has completed
         the transitional goodwill impairment test and has determined that the
         Company did not have a transitional impairment of goodwill.

         As required by SFAS 142, the Company has not amortized goodwill
         associated with acquisitions completed after June 30, 2001 for any
         period presented and ceased amortization of goodwill associated with
         acquisitions completed prior to July 1, 2001, effective January 1,
         2002. Prior to January 1, 2002, the Company amortized goodwill
         associated with the pre-July 1, 2001 acquisitions over four years using
         the straight-line method. Identifiable intangible assets (acquired
         technology, patent applications & customer base) are currently
         amortized over two or five years using the straight-line method. Refer
         to notes 4 and 5 for further discussion of the Company's intangible
         assets and goodwill.

     m)  Impairment of Long-Lived Assets

         The Company tests goodwill for impairment in accordance with SFAS 142.
         SFAS 142 requires that goodwill be tested for impairment at the
         "reporting unit level" ("Reporting Unit") at least annually and more
         frequently upon the occurrence of certain events, as defined by SFAS
         142. Goodwill is tested for impairment annually in a two-step process.
         First, the Company determines if the carrying amount of its Reporting
         Unit exceeds the

11
<PAGE>

                              AXEDA SYSTEMS INC.
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         "fair value" of the Reporting Unit, which would indicate that goodwill
         may be impaired. If the Company determines that goodwill may be
         impaired, the Company compares the "implied fair value" of the
         goodwill, as defined by SFAS 142, to its carrying amount to determine
         if there is an impairment loss. The Company does not have any goodwill
         that it considers to be impaired.

         On January 1, 2002, the Company adopted SFAS No. 144 "Accounting for
         the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which
         supersedes certain provisions of APB Opinion No. 30 "Reporting the
         Results of Operations - Reporting the Effects of Disposal of a Segment
         of a Business, and Extraordinary, Unusual and Infrequently Occurring
         Events and Transactions" ("APB 30"), and supersedes SFAS 121,
         "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
         Assets to Be Disposed Of" ("SFAS 121"). There was no adjustment
         required upon adoption of SFAS 144. In accordance with SFAS 144, the
         Company evaluates long-lived assets, including intangible assets other
         than goodwill, for impairment whenever events or changes in
         circumstances indicate that the carrying value of an asset may not be
         recoverable based on expected undiscounted cash flows attributable to
         that asset. The amount of any impairment is measured as the difference
         between the carrying value and the fair value of the impaired asset.
         SFAS 144 provides guidance on how a long-lived asset that is used
         as part of a group should be evaluated for impairment, establishes
         criteria for when a long-lived asset is held for sale, and prescribes
         the accounting for a long-lived asset that will be disposed of other
         than by sale. SFAS 144 retains the basic provisions of APB 30 on how to
         present discontinued operations in the income statement but broadens
         that presentation to include a component of an entity (rather than a
         segment of a business). The Company does not have any long-lived assets
         it considers to be impaired.

     n)  Reclassifications

         Certain prior year amounts have been reclassified to conform with the
         current year presentation.

     o)  Recent Accounting Pronouncements

         On April 30, 2002, the FASB issued SFAS No. 145, "Rescission of FASB
         Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
         Technical Corrections" ("SFAS 145"). The Statement updates, clarifies
         and simplifies existing accounting pronouncements. This Statement also
         makes technical corrections to existing pronouncements. While those
         corrections are not substantive in nature, in some instances, they may
         change accounting practice.

         The Company does not expect the adoption of SFAS 145 to have a
         significant impact on the Company's results of operations, financial
         position or cash flows.

2)   Comprehensive Income (Loss)

     The components of comprehensive income (loss) are as follows (in
thousands):

12
<PAGE>

                              AXEDA SYSTEMS INC.
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

<TABLE>
<CAPTION>
                                                                         Three Months Ended March 31,
                                                                         ----------------------------
                                                                           2002                2001
                                                                         --------            --------
<S>                                                                      <C>                 <C>
Net income (loss)                                                        $(9,112)            $ 39,735
Foreign currency translation adjustment                                        76                (19)
Unrealized gain on available-for-sale investment                                -                  18
                                                                                -                  --
                                                                         --------            --------
Comprehensive income (loss)                                              $(9,036)            $ 39,734
                                                                         ========            ========
</TABLE>

3)   Inventories

       Inventories, net consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                 March 31,            December 31,
                                                                   2002                  2001
                                                           --------------------    -----------------
<S>                                                                      <C>                <C>
Raw materials                                                            $ 128              $   936
Finished products                                                          156                1,134
                                                           --------------------    -----------------

Inventories, net                                                          $284              $ 2,070
                                                           ====================    =================
</TABLE>

4)   Intangible Assets

     Acquired intangible assets that are subject to amortization at March 31,
     2002 and December 31, 2001, consist of the following (in thousands):

<TABLE>
<CAPTION>
                                      Gross Carrying Amount            Accumulated Amortization
                                      ---------------------            ------------------------

                                      March 31,        December          March 31,         December
                                      ---------        --------          ---------         --------
                                        2002           31, 2001            2002            31, 2001
                                        ----           --------            ----            --------
<S>                                   <C>               <C>                  <C>             <C>
Developed Technology                    $ 1,378           $ 1,378              $230            $  55
Core Technology                           7,055             7,055               470              116
Patent Applications                         990               990                66               16
Customer Base                               322               322                21                5
                                        -------           -------           -------            -----
     Total                              $ 9,745           $ 9,745              $787            $ 192
                                        =======           =======           =======            =====
</TABLE>

     Aggregate amortization expense was approximately $0.6 million for the three
     months ended March 31, 2002. Estimated aggregate expense for the nine-month
     period from April 1, 2002 to December 31, 2002, and each of the years
     thereafter, is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                  Charged to:
                                                                           --------------------------
                                                                           Cost of          Operating
                                                            Total          revenues          expense
                                                            -----          --------          -------
<S>                                                         <C>            <C>               <C>
Period ending December 31,
2002..............................................          $1,772          $1,575             $197
2003..............................................           2,305           2,043              262
2004..............................................           1,673           1,411              262
2005..............................................           1,673           1,411              262
2006..............................................           1,535           1,294              241
</TABLE>

13
<PAGE>

                              AXEDA SYSTEMS INC.
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

5)   Goodwill

     The changes in the gross carrying amount of goodwill for the three months
     ended March 31, 2002 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                       DRM Systems
                                                                       ------------
<S>                                                                        <C>
Balance as of December 31, 2001                                            $   20,819
Goodwill adjustments during the period, net                                      (32)
                                                                                 ----
Balance as of March 31, 2002                                               $   20,787
                                                                           -----------
</TABLE>

     Goodwill adjustments primarily represent increases for additional
accounting and legal fees related to the purchase of eMation of approximately
$72,000 and adjustments to liabilities assumed on the date of acquisition of
approximately $104,000 that were settled at amounts less than the present values
estimated on the date of the acquisition.

     Goodwill acquired in 2001 is not expected to be deductible for income tax
     purposes.

     Summarized below are the effects on net income (loss) and net income (loss)
     per share data, if the Company had followed the amortization provisions of
     SFAS 142 for all periods presented (in thousands, except per share
     amounts):

<TABLE>
<CAPTION>
                                                              For Three Months Ended March 31,
                                                                 2002                  2001
                                                           -----------------------------------------
<S>                                                                 <C>                   <C>
Reported net income (loss)                                         $ (9,112)              $ 39,735
Add Back:  Goodwill amortization                                           -                 1,444
                                                           -----------------------------------------

Adjusted net income (loss)                                         $ (9,112)              $ 41,179
                                                           =========================================

Basic earnings (loss) per share:
  Reported net income (loss)                                       $  (0.34)              $   2.28
  Goodwill amortization                                                    -                  0.08
                                                           -----------------------------------------
  Adjusted net income (loss)                                       $  (0.34)              $   2.36
                                                           =========================================

Diluted earnings (loss) per share:
  Reported net income (loss)                                       $  (0.34)              $   2.14
</TABLE>

14
<PAGE>

                              AXEDA SYSTEMS INC.
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

<TABLE>
  <S>                                                               <C>                     <C>
  Goodwill amortization                                                    -                  0.08
                                                           -----------------------------------------
  Adjusted net income (loss)                                        $ (0.34)                $ 2.22
                                                           =========================================
</TABLE>

6)   Acquisition

     On December 7, 2001, the Company acquired all of the outstanding shares of
     eMation, Ltd., a private company organized under the laws of the State of
     Israel and headquartered near Boston, Massachusetts, a developer of
     Internet-based solutions that extract and manage information from
     intelligent devices and make that information available to people and
     business systems. The Company acquired eMation to acquire a company with
     greater opportunity than its existing product line. As a result of the
     acquisition, the Company is a provider of DRM solutions worldwide. The
     Company also expects to reduce costs through economies of scale. The
     results of eMation's operations are included in the Company's consolidated
     financial statements since the date of acquisition.

     The Company acquired eMation in consideration for: 8 million shares of
     Axeda common stock, valued at approximately $17.4 million; the assumption
     of 1,428,710 shares of Axeda common stock reserved for issuance upon
     exercise of assumed eMation stock options, 530,000 of which are exercisable
     for $0.01 per share and the remaining 898,710 exercisable at $2.14 per
     share; options exercisable for up to 113,600 shares of Axeda common stock
     issued at closing pursuant to the Company's 1999 Stock Incentive Plan; and
     warrants exercisable for up to 7,000 shares of Axeda common stock
     exercisable at $2.14 issued to ex-employees of eMation in consideration for
     cancellation of outstanding options to purchase shares of eMation. The
     aggregate value of these issued and assumed options and warrants was
     approximately $2.6 million. The total combined value of the securities
     assumed and issued was approximately $20 million and the Company incurred
     transaction costs of approximately $3.4 million related to the eMation
     acquisition, for an aggregate purchase price of $23.4 million. The Company
     also issued or assumed warrants at closing exercisable for up to 115,238
     shares of Axeda common stock with exercise prices ranging from $2.14 to
     $21.51 per share to holders of warrants exercisable for shares of eMation.
     The Company also assumed approximately $5 million of eMation net debt. The
     acquisition was recorded under the purchase method of accounting.

     Unaudited Pro Forma Financial Information

         The following unaudited pro forma financial information presents the
         results of operations of the Company for the three months ended March
         31, 2001, as if the acquisition occurred on January 1, 2001. The
         unaudited pro forma financial information for the three months ended
         March 31, 2001 does not necessarily reflect the results of operations
         that would have resulted had the acquisition occurred on January 1,
         2001, nor is it necessarily indicative of future results (in thousands
         except per share data).

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
                                                                            Three Months Ended
                                                                              March 31, 2001
                                                                              ==============
<S>                                                                                     <C>
-------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------
Revenues.........................................................                        $ 5,462
                                                                                         -------
-------------------------------------------------------------------------------------------------
                                                                                              -
-------------------------------------------------------------------------------------------------
Net income.......................................                                       $ 36,122
                                                                                        --------
-------------------------------------------------------------------------------------------------
                                                                                               -
-------------------------------------------------------------------------------------------------
</TABLE>

15
<PAGE>

                              AXEDA SYSTEMS INC.
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

<TABLE>
-------------------------------------------------------------------------------------------------
<S>                                                                                       <C>
Basic net income per weighted average common share
outstanding............................................                                   $ 1.42
                                                                                          ------
-------------------------------------------------------------------------------------------------
                                                                                               -
-------------------------------------------------------------------------------------------------
Diluted net income per weighted average common share
outstanding............................................                                   $ 1.32
                                                                                          ------
-------------------------------------------------------------------------------------------------
</TABLE>

7)   Sales of Assets

     a)  Sale of Consumer Electronics Assets

         On March 1, 2001, pursuant to an Asset Acquisition Agreement, the
         Company sold certain assets related to its CE business to
         STMicroelectronics NV ("STMicroelectronics"), a Dutch corporation. The
         assets sold included certain contracts, equipment, intangible assets,
         intellectual property, prepaid expenses, accounts receivable and other
         assets primarily related to the operations of the CE business. In
         connection with the sale, the Company and STMicroelectronics entered
         into certain agreements including an Assignment and Assumption of Lease
         with respect to the Company's former corporate headquarters office
         facility located in Malvern, Pennsylvania. Certain employees of the
         Company entered into employment agreements with STMicroelectronics.
         Pursuant to the terms of the Asset Acquisition Agreement,
         STMicroelectronics paid approximately $55.6 million in cash
         consideration, of which $0.7 million remains held in escrow by a third
         party for indemnification purposes until September 2002 and is included
         in restricted cash in the consolidated balance sheet as of March 31,
         2002. In connection with the asset sale, the Company and certain of its
         subsidiaries granted to STMicroelectronics certain non-exclusive rights
         to license and distribute certain of its technology used in its IA
         products (note 7b) and PC products.

         The Company recorded a gain on the sale of approximately $47.5 million
         during the quarter ended March 31, 2001. The net gain was calculated as
         follows (in thousands):

Sale price................................................             $ 55,602
Accounts receivable acquired..............................                (261)
Accrued expenses assumed..................................                  137
Net book value of deferred stock compensation.............                (498)
Net book value of furniture and equipment sold............              (2,036)
Net book value of goodwill and intangible assets..........                (968)
Other assets..............................................                 (18)
Employee transition and inducement costs..................              (2,956)
Professional and legal fees...............................              (1,487)
                                                                     -----------

16
<PAGE>

                              AXEDA SYSTEMS INC.
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

<TABLE>
<S>                                                                                  <C>
Gain on sale of CE assets...............................                             $ 47,515
                                                                                   ===========
</TABLE>

     b)  Sale of Internet Appliance Assets

         On March 23, 2001, pursuant to an Asset Acquisition Agreement, the
         Company sold certain assets related to its IA business to Phoenix
         Technologies Ltd. ("Phoenix"), a Delaware corporation. The assets sold
         included certain contracts, equipment, intangible assets, intellectual
         property and prepaid expenses primarily related to the operations of
         the IA business, including those purchased from Teknema. Certain
         employees of the Company entered into employment agreements with
         Phoenix Technologies, Ltd. Pursuant to the terms of the Asset
         Acquisition Agreement, Phoenix paid $18 million in cash consideration,
         of which $1.8 million was being held by a third party in escrow for
         indemnification purposes until March 2002. In March 2002, the Company
         received $1.3 million, including interest of approximately $0.05
         million, of the amount held in escrow. The remaining escrow balance of
         approximately $0.55 million has been withheld pending the settlement of
         a claim submitted by Phoenix and is included in restricted cash in the
         consolidated balance sheet as of March 31, 2002 . The Company is unable
         to predict the resolution of this matter, or reasonably estimate any
         amount of loss given the current status of this matter. Any escrow
         amounts not returned to the Company will be recorded as a charge to the
         gain on sale of assets in the period in which such determination is
         made.

         The Company recorded a gain on the sale of approximately $4.5 million
         during the quarter ended March 31, 2001. The net gain was calculated as
         follows (in thousands):

<TABLE>
<S>                                                                                       <C>
Sale Price.......................................................................         $ 18,000
Prepaid expenses.................................................................             (954)
Net book value of deferred stock compensation ...................................             (121)
Net book value of furniture and equipment sold...................................             (466)
Net book value of goodwill and intangible assets.................................          (10,586)
License fee......................................................................             (250)
Employee transition and inducement costs.........................................             (763)
Professional and legal fees incurred.............................................             (338)
                                                                                     ---------------
Gain on sale of IA assets........................................................          $  4,522
                                                                                     ===============
</TABLE>

     c)  Unaudited Pro Forma Financial Information

         The following unaudited pro forma financial information presents the
         results of operations of the Company for the three months ended March
         31, 2001, as if the dispositions occurred on January 1, 2001, after
         giving effect to certain adjustments, primarily revenues and personnel
         costs associated with the disposed businesses, amortization of
         goodwill, the gains recorded upon the dispositions and income taxes.
         The unaudited pro forma financial information for the three months
         ended March 31, 2001 does not necessarily reflect the results of
         operations that would have occurred had the dispositions been completed
         on January 1, 2001 (in thousands except per share data).

17
<PAGE>

                              AXEDA SYSTEMS INC.
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

<TABLE>
<CAPTION>
                                                                      Three Months Ended
                                                                         March 31, 2001
                                                                         --------------
<S>                                                              <C>             <C>
Revenues.......................................................                  $  2,369
                                                                                 --------
                                                                                        -
Net loss.......................................                                  $(4,110)
                                                                                 --------
                                                                                        -
Basic and diluted net loss per weighted average common share
outstanding............................................                          $ (0.24)
                                                                                 --------
</TABLE>

8)   Notes Payable

     a)  Note Payable - Bank Leumi

         In connection with the closing of the share purchase agreement to
         acquire eMation on December 7, 2001, the Company acquired the balance
         of $1,650,000 of eMation's amount outstanding under a $1,700,000 line
         of credit with Bank Leumi in Israel. The line of credit was paid in
         full in January 2002, including interest of approximately $21,000.

     b)  Equipment Line of Credit

         As of March 31, 2002, the Company had approximately $547,000
         outstanding on an equipment line of credit with EVP with interest rates
         ranging from 12% to 13% and payments due monthly over a 36 month
         period. The line of credit was available to finance purchases of
         capital equipment through September 30, 2001. In connection with the
         agreement, EVP has a senior security interest in substantially all of
         eMation's capital equipment. In addition, the line of credit agreement
         requires the Company to provide EVP with copies of quarterly financial
         statements within 45 days of the end of each quarter and audited annual
         financial statements within 90 days of the end of each year as well as
         other information and notifications regarding eMation's financial and
         operating results.

         As of March 31, 2002, the Company was in compliance with all of its
         covenants to EVP.

9)   Accrued Expenses

     Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                                    March 31,       December 31,
                                                                      2002               2001
                                                               --------------------------------------
<S>                                                                      <C>                <C>
Legal and professional fees................................              $1,317             $2,708
</TABLE>

18
<PAGE>

                              AXEDA SYSTEMS INC.
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

<TABLE>
<S>                                                                      <C>                <C>
Payroll and related costs..................................               2,237              2,951
Severance..................................................                 432                899
Unutilized leased facility................................                  110                107
Royalties to Israeli government agencies..................                  628                620
Legal settlements.....................................                      277                277
Accrued Dolby royalties...................................                   43                122
Sales, excise and other taxes...............                                229                192
Other...................................................                  1,035              1,052
                                                                          ------             ------
                                                                         $6,308             $8,928
                                                                         -------            -------
</TABLE>

10)  Equity Transactions

     a)  Employee Stock Options Granted

         In February 2002 the Company granted 1,012,200 stock options to
         employees, including 100,000 to the current Chief Executive Officer of
         the Company, with an exercise price per share equal to not less than
         the fair market value of the Company's common stock on the date of
         grant.

         In February 2002 the Company granted 20,000 stock options to employees
         with an exercise price of $0.01 per share, which was less than the fair
         market value of the Company's common stock on the date of grant. The
         Company has recorded approximately $50,000 of deferred stock
         compensation, which is being amortized over the vesting term of 2
         years.

     b)  Accelerated Vesting

         Under the terms of the employment agreement with the Company's current
         CEO 100,000 options with an exercise price of $0.01 per share, which
         were granted to the current CEO in August 2001, that, under the terms
         of the award would have vested from February 2002 to August 2003, were
         to vest in February 2002 upon the continued employment of the current
         CEO as of and after that date. Upon the continued employment of the
         current CEO as of and after February 2002, the respective options
         vested and were exercisable. For the three months ended March 31, 2002,
         the Company recorded a charge of approximately $164,000, which is
         included in non-cash compensation general and administrative expense in
         the accompanying statement of operations, for deferred stock
         compensation that was initially recorded in August 2001.

     c)  Amendment to 1999 Stock Incentive Plan

         On May 7, 2002, the Company filed a proxy statement asking stockholders
         to vote on, among other matters, a proposal to increase the number of
         shares available for issuance under the Company's 1999 Stock Incentive
         Plan from 3,225,000 shares to 3,725,000 shares, excluding the annual
         automatic increase shares.

11)  Related Party Transactions

     In January 2002, under the terms of the separation agreement with the
     Company's former CEO as director, the Company modified the terms of Company
     stock options awarded during the term of employment with the Company to
     immediately vest all remaining outstanding stock options awarded and to
     permit the continued exercise of the options subsequent to termination
     until the earlier of the expiration date for the respective options or
     January 9,

19
<PAGE>

                              AXEDA SYSTEMS INC.
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

     2005. The Company recorded a charge of approximately $206,000 related to
     the accelerated vesting, primarily for the remaining balance of deferred
     stock compensation that was initially recorded in June 1999 and July 2001,
     and $223,000 related to the modification for continued exercisability of
     the options, resulting primarily from the incremental intrinsic value on
     the date of the modification of options granted in July 1997 and July
     2001. The total charge of approximately $429,000 is included in non-cash
     compensation general and administrative expense in the accompanying
     statement of operations for the three months ended March 31, 2002. In
     addition, the Company forgave loans totaling approximately $414,000,
     including interest of approximately $16,000. The loan forgiveness and
     related employment taxes, totaling approximately $600,000 were accrued and
     charged to general and administrative expense in December 2001.

12)  Commitments and Contingencies

     On November 27, 2001, a putative shareholder class action was filed against
     the Company, certain of the Company's officers and directors, and several
     investment banks that were underwriters of the Company's initial public
     offering. The action was filed in the United States District Court for the
     Southern District of New York, purportedly on behalf of investors who
     purchased the Company's stock between July 15, 1999 and December 6, 2000.
     The lawsuit alleges violations of Sections 11, 12(a)(2) and 15 of the
     Securities Exchange Act of 1933 and Section 10(b) of the Securities
     Exchange Act of 1934 and Rule 10b-5 promulgated thereunder against one or
     both of the Company and the individual defendants. The claims are based on
     allegations that the underwriter defendants agreed to allocate stock in the
     Company's July 15, 1999 initial public offering to certain investors in
     exchange for excessive and undisclosed commissions and agreements by those
     investors to make additional purchases in the aftermarket at pre-determined
     prices. Plaintiffs allege that the Prospectus for the Company's initial
     public offering was false and misleading in violation of the securities
     laws because it did not disclose these arrangements. This lawsuit is part
     of the massive "IPO allocation" litigation involving the conduct of
     underwriters in allocating shares of successful initial public offerings.
     The Company believes that more than one hundred and eighty other companies
     have been named in more than eight hundred identical lawsuits that have
     been filed by some of the same plaintiffs' law firms. Certain of Axeda's
     employees are members of the putative classes alleged in these actions and
     therefore may have interests adverse to the Company with respect to the
     alleged claims in these actions. The Company believes that such lawsuit and
     claims are without merit and that the Company has meritorious defenses to
     the actions. The Company plans to vigorously defend the litigation.
     However, failure to successfully defend this action could substantially
     harm Axeda's results of operations, liquidity and financial condition.

     Between February and April 2000, eleven class action lawsuits were filed
     against Axeda and certain of its officers and directors in the United
     States District Court for the Eastern District of Pennsylvania. On May 25,
     2000, the cases were consolidated under Civil Action No. 00-CV-1014, and
     entitled "In re RAVISENT Technologies Inc. Securities Litigation". Pursuant
     to the court's consolidation order, a consolidated and amended class action
     complaint was filed on June 14, 2000 with an alleged class period of July
     15, 1999 through April 27, 2000. This complaint alleges violations of the
     federal securities laws, specifically Sections 11 and 15 of the Securities
     Exchange Act of 1933, Sections 10(b) and 20(a) of the Securities Exchange
     Act of 1934, and Rule 10b-5 promulgated thereunder and seeks

20
<PAGE>

                              AXEDA SYSTEMS INC.
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

     unspecified damages on behalf of a purported class of purchasers of the
     Company's stock during the period stated above. On July 3, 2000, the
     Company filed a motion to dismiss the consolidated and amended class
     action complaint. The motion is presently fully briefed and the parties
     are awaiting a hearing date to be set for the motion. In connection with
     the Company's initial public offering, the Company purchased directors and
     officers insurance that provides the Company with protection from claims
     made against officers, directors or the Company arising from claims
     including but not limited to any written demand for damages and any civil,
     criminal, administrative, or regulatory proceedings and appeals. Certain
     of the Company's employees and certain holders of 5% or more of the
     Company's common stock are members of the putative classes alleged in
     these actions and therefore may have interests adverse to the Company with
     respect to the alleged claims in these actions. The Company believes that
     such lawsuits or claims are without merit and that the Company has
     meritorious defenses to the actions. The Company plans to vigorously
     defend the litigation. However, failure to successfully defend these
     actions could substantially harm the Company's results of operations,
     liquidity and financial condition.

     In June 2000, the Company entered into a one-year distribution rights
     agreement ("the Agreement") with American Trading S.A. ("ATSA") for
     exclusive distribution of the Company's Internet television set-top box
     product in Brazil. Upon the signing of the Agreement, the Company issued a
     warrant to purchase 1,500,000 shares of the Company's common stock to ATSA
     with an exercise price of $7.00 per share, which approximated fair market
     value on the date of grant. The warrant was fully vested and
     non-forfeitable on the date of grant, had a two-year term, and contained
     certain exercise restrictions as described in the warrant agreement.

     Due to the parties' differing interpretations of the terms of the
     Agreement, in January 2001 the parties entered into a settlement and
     release agreement ("the Release"). The Release provides for the immediate
     termination of the Agreement, including the right for Axeda to terminate
     the warrant and a royalty-free right in 2001 for Axeda to use the mark
     "WWWTV", which Axeda owns as of January 1, 2002. In addition, in January
     2001 the Company paid approximately $1.2 million to ATSA in exchange for
     the settlement and release and was required to pay an additional minimum
     finder's fee of $1 million in January 2002 for sales of the Internet
     set-top box in Brazil in 2001. The aggregate amount of the settlement of
     $2.2 million, net of the estimated fair value of the canceled warrant of
     $0.4 million is included in other selling and marketing expenses in the
     consolidated statement of operations for the year ended December 31, 2001.
     In January 2002, the parties were in disagreement about whether and to what
     extent a payment for any finders fee was due to ATSA for 2001. On January
     30, 2002, the parties entered into a confidential general settlement and
     release agreement, which resolved the dispute between the parties
     concerning the payment of a finder's fee. In connection with the January
     2002 settlement, in January 2002 the Company paid $325,000 in cash to ATSA
     and transferred title to 15,000 Internet set-top boxes, with a net book
     value of approximately $675,000, for an aggregate and final settlement of
     the liability to ATSA of $1,000,000.

     Various third parties have notified the Company, as well as some of the
     Company's customers, that the Company's products infringe patents held by
     such third parties. The Company has not determined whether and to what
     extent the patents held by such third parties are valid and whether and to
     what extent Axeda's products may infringe such patents. Axeda is unable to
     predict the outcome of these matters, or reasonably estimate a range of

21
<PAGE>

                              AXEDA SYSTEMS INC.
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

     possible loss given the current status of these matters.

     In May 2002, the Company received preliminary notification from a customer,
     who licenses the Company's products on a per-unit basis, that the customer
     may have incorrectly reported to the Company its sales of the Company's
     products from October to December 2001. These sales were reported to the
     Company in January 2002 and are included in the Company's license revenues
     for the quarter ended March 31, 2002. The notification indicates that
     actual sales of products by the customer to end-users may have been less
     than the actual units initially reported to the Company by the customer.
     The Company is evaluating the merits of the notification, which may result
     in a decrease of up to approximately $0.1 million in both license revenues
     and license cost of revenues in the period in which the difference is
     resolved.

     In May 2002, Axeda entered in to a lease for approximately 35,000 square
     feet of space in an office building in the same business park as the
     Company's current offices located in Mansfield, Massachusetts. This
     facility is leased an average annual rental of approximately $500,000,
     including operating expenses, utilities and taxes, and will be used for
     research and development, sales and support and administrative activities.
     The lease commences in June 2002 and expires in July 2007. Axeda obtained
     an irrevocable, cash-secured, standby letter of credit (the "letter of
     credit") from a bank as security and for the benefit of the lessor for
     $0.15 million. The letter of credit expires in August 2003 and provides for
     automatic one-year renewals, but not beyond August 2007. The letter of
     credit is secured by a certificate of deposit for $0.15 million from the
     same bank, and also expires in August 2003. This amount is restricted for
     withdrawal and will be included in non-current assets in the Company's
     consolidated balance sheets through August 2002.

     From time to time, the Company has received, and expects to continue to
     receive, notices of claims of infringement of other parties' proprietary
     rights and other claims in the ordinary course of business. Management
     believes the amount of the ultimate liability with respect to these claims
     will not materially affect the Company's financial position, results of
     operations, or cash flows.

13)  Segment Information

     The Company operates in a single industry segment, which is the development
     and licensing of its technology.

     The Company sells and licenses its technology to customers primarily in
     North America and Europe. The net income (loss) from operations for all
     periods presented is derived primarily from the company's North American
     operations, which generates revenues from the following geographic regions:

<TABLE>
<CAPTION>
                                                           Three Months Ended March 31,
                                        -------------------------------------------------------------------
Country/ Geographic Region                           2002                                2001
--------------------------              ---------------------------        --------------------------------
                                            $ - `000's   % of total            $ - `000's        % of total
                                          ------------ - ----------      -   ------------   -    ---------
<S>                                             <C>             <C>                <C>                 <C>
North America:
     United States                              $ 2,072         45%                $1,920              68%
     Canada                                         677          14                   603               21
                                        --------------- -----------     -----------------     ------------
          Total - North America                   2,749          59                 2,523               89
                                        --------------- -----------     -----------------     ------------

Europe:
     Germany                                        273           6                    64                2
     France                                         598          13                    15                1
     Netherlands                                    263           6                     -                -
     United Kingdom                                 124           3                     -                -
     Other                                          262           5                    28                1
                                        --------------- -----------     -----------------     ------------
          Total - Europe                          1,520          33                   107                4
                                        --------------- -----------     -----------------     ------------

Asia-Pacific:
     Israel                                         101           2                     -                -
     Japan                                          212           5                   185                7
     Other                                           33           1
                                        --------------- -----------     -----------------     ------------
          Total - Asia-Pacific                      346           8                   185                7
                                        --------------- -----------     -----------------     ------------

South America - Other                                25           -                     1                -
                                        --------------- -----------     -----------------     ------------

Total                                            $4,640        100%                $2,816             100%
                                        =============== ===========     =================     ============
</TABLE>

22
<PAGE>

                              AXEDA SYSTEMS INC.
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


14)  Segment Reporting

     Segment information is presented in accordance with Statement of Financial
     Accounting Standards No. 131 ("SFAS 131"), "Disclosures About Segments Of
     An Enterprise And Related Information." This standard requires segmentation
     based upon the Company's internal organization and disclosure of revenue
     and operating income based upon internal accounting methods. For the
     quarter ended March 31, 2002 the Company had three reportable segments:
     device relationship management ("DRM") systems, personal computer
     ("PC") and Internet appliance ("IA") (note 6 and note 7). For the quarter
     ended March 31, 2001, the Company had a consumer electronics ("CE")
     segment.

     DRM Systems: Created as a result of the acquisition of eMation in December
     2001 (note 6), this segment provides a distributed software solution
     designed to enable businesses to remotely monitor, manage and service
     intelligent devices. DRM enables the live exchange of information via the
     Internet, between remotely deployed "intelligent devices" (instruments,
     equipment, machines, facilities, appliances, vehicles, sensors or systems
     incorporating computer-based control technology) and the people that build,
     service and use them. The Axeda DRM(TM) System enables manufacturers and
     service providers to use the Internet to establish and manage continuous
     connections with devices deployed at their customers' facilities, allowing
     them to stay in touch with their products throughout their lifecycle,
     tapping the value of remote device information with new, automated
     e-service, operations monitoring, and e-commerce offerings. The product
     offerings enable customers to gain business insight and benefits from live
     information sources by helping them capitalize on the wealth of previously
     unavailable device performance and usage data.

     PC: This segment designs, develops, licenses and markets core-based modular
     software solutions that enable digital video and audio stream management in
     PC systems. The segment also provides supporting hardware designs to
     selected customers as well as customization services and customer support.
     The segments solutions enable decoding (playback) and encoding (recording)
     of multimedia formats such as digital versatile disk ("DVD"); direct
     broadcast satellite ("DBS") and high-definition television ("HDTV") on
     personal computers.

     CE: This segment designed, developed, licensed and marketed core-based
     modular software solutions that enable digital video and audio stream
     management in CE devices. The segment also provided supporting hardware
     designs to selected customers as well as customization services and
     customer support. The segments solutions enable decoding (playback) and
     encoding (recording) of multimedia formats such as digital versatile disk
     ("DVD"); direct broadcast satellite ("DBS") and high-definition television
     ("HDTV") on existing CE platforms (note 7a).

23
<PAGE>

                          AXEDA SYSTEMS INC.
     NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

     IA: The Company's Internet technology segment was involved in the
     development of products for the emerging market in information appliances.
     The segment sold IA hardware reference designs and software technology
     through intellectual property licenses and agreements with Internet service
     providers. This segment provided the Company with a number of
     Internet-related products, including an efficient web browser, and several
     IA reference designs including a Web Pad design, Internet ready TV and
     monitor designs and an Internet-ready screenphone (note 7b). Revenues from
     this segment are the result of the sales of remaining inventories purchased
     for this business.

     The Company evaluates operating segment performance based on revenue and
     gross profit. It has not historically evaluated segment performance based
     on operating income nor allocated assets to its individual operating
     segments.

<TABLE>
<CAPTION>
                                                                                Three Months Ended March 31,
                                                                                2002              2001*
                                                                          ----------------  ----------------
                                                                                     (In thousands)
<S>                                                                           <C>                  <C>
Revenue:
    DRM Systems..........................................                       $ 2,494            $     -
    PC...............................................                             1,107              2,369
    IA.........................................................                   1,039                 26
    CE....................................................                            -                421
                                                                          ----------------   ---------------
Total..................................................                         $ 4,640            $ 2,816
                                                                          ================   ===============
Gross profit (excluding software amortization of $529):
    DRM Systems..........................................                       $ 1,495            $     -
    PC.................................                                             353              1,837
    IA............................................................                   31                (2)
    CE.............................................                                   -                327
                                                                          ----------------   ---------------
Total...................................................                        $ 1,879            $ 2,162
                                                                          ================   ===============
</TABLE>

* - Does not include eMation, which was acquired in December 2001 (note 6).

24
<PAGE>

                               AXEDA SYSTEMS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

ITEM 2:

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following discussion of our financial condition and our results of
operations should be read in conjunction with the unaudited condensed
consolidated financial statements and notes thereto included elsewhere in this
report. The information herein contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 that involve a
number of risks and uncertainties. Such statements are based on current
expectations of future events that involve a number of risks and uncertainties
that may cause the actual events of future results to differ from those
discussed herein. Such factors include, but are not limited to: the transition
in businesses we are currently undergoing; fluctuating quarterly operating
results; uncertainties in the market for DRM products and the potential for
growth in the pervasive computing market; our ability to integrate acquisitions;
present and future competition; our ability to manage technological change and
respond to evolving industry standards; our ability to manage growth and attract
and retain additional personnel; the long sales cycle for DRM products; limited
distribution channels; the difficulty of protecting proprietary rights; the
potential for defects in products; claims for damages asserted against us; risks
associated with our digital media business and the search for strategic
alternatives for such business; our ability to raise capital; risks from
international operations; and others discussed in this section and in Item 3
under "Factors That May Affect Future Results." In addition, such
forward-looking statements are necessarily dependent upon assumptions, estimates
and dates that may be incorrect or imprecise and involve known and unknown risks
and other factors. Accordingly, any forward-looking statements included herein
do not purport to be predictions of future events or circumstances and may not
be realized. Forward-looking statements can be identified by, among other
things, the use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should," "seeks," "pro forma," "anticipates," "plans,"
"estimates," or "intends," or the negative of any thereof, or other variations
thereon or comparable terminology, or by discussions of strategy or intentions.
Given these uncertainties, prospective investors are cautioned not to place
undue reliance on such forward-looking statements. All forward-looking
statements and reasons why results may differ included in this report are made
as of the date of this report, and except as required by law, we disclaim any
obligations to update any such factors or to publicly announce the results of
any revisions to any of the forward-looking statements contained herein or
reasons why results might differ to reflect future events or developments.
References herein to "Axeda", "we," "our," and "us" collectively refer to Axeda
Systems Inc., a Delaware corporation, and all of its direct and indirect U.S.,
Israeli, Japanese, European and Canadian subsidiaries.

OVERVIEW AND RECENT EVENTS

The quarter ending March 31, 2002 marked the first period in which we reported a
full quarter's activity of eMation, Ltd ("eMation"), a private company organized
under the laws of the State of Israel, which we acquired on December 7, 2001.
The acquisition provided us with an immediate entry into the enterprise software
and services market. Axeda now provides a new category of enterprise software
products called Device Relationship Management ("DRM") System, which allows
companies to utilize the Internet or wireless communications to access and
exploit hidden information within remote machines, devices and facilities. For
the quarter ended March 31, 2002 revenues from our DRM business were
approximately $2.5 million or 54% of our total revenues for the quarter.
Excluding non-cash software amortization, gross profit for the DRM

25
<PAGE>

                               AXEDA SYSTEMS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

business was approximately $1.5 million or 60% of our total DRM revenues.

We continue to sell digital media software solutions and technology, which allow
decoding and encoding of multimedia formats such as DVD, DBS/DVB and HDTV
primarily on personal computer ("PC") platforms. During the first quarter of
2002 our digital media customers consisted primarily of computer graphics chip
and board manufacturers and end users accessing the web for our latest product
offerings. Approximately $1.1 million or 24% of our total revenues for the
quarter ended March 31, 2002 were from licensing our digital media software
solutions. Gross profit from our digital media business was $0.4 million or 32%
of our digital media revenues. We will continue to seek and evaluate strategic
alternatives for our digital media business.

We realized approximately $1.0 million in hardware revenues from sales of excess
Internet appliance ("IA") components of approximately $0.8 million, and sales of
our Internet set-top boxes totaling approximately $0.2 million for the quarter
ended March 31, 2002, as part of our plan to sell the inventories of our former
IA business. These sales represented 22% of our total revenues and 2% of our
total gross profit for the quarter ended March 31, 2002..

Over the course of 2001 we completed several transactions transforming our
product offerings and shifting the markets in which we compete. Prior to March
2001, we designed, developed, licensed and marketed innovative modular software
solutions that enabled digital video and audio stream management in PC systems,
CE devices and Internet appliances. We also licensed supporting hardware designs
to select customers, provided customization services and customer support. In
addition, we also sold Internet appliances and components to telecommunications
companies, Internet service providers and others. Our product offerings included
a software or hardware Internet set-top box solution, which included all of the
intellectual property, software, hardware design and manufacturing design
necessary for a manufacturer or Internet service provider to launch an
affordable product and Nucleo, a hardware reference design based on our ARM-7500
processors with e-Surfer(TM) - a thin customizable browser designed specifically
for Internet appliances.

During the first quarter of 2001 we sold substantially all of the assets of our
consumer electronics ("CE") and Internet appliance ("IA") businesses and in the
process raised approximately $73.6 million, enabling us to pursue other
strategic alternatives. Effective as of March 1, 2001, pursuant to an asset
acquisition agreement dated as of January 18, 2001, along with our subsidiaries,
Ravisent I.P., Inc., Ravisent Operating Company, Inc. and VIONA Development Hard
and Software Engineering GmbH & Co. KG, we sold and licensed substantially all
of our assets related to our CE business to STMicroelectronics, NV, a Dutch
corporation, STMicroelectronics, Inc., a Delaware corporation, and
STMicroelectronics GmbH (collectively, STMicroelectronics). The assets sold and
licensed included contracts, equipment, intangible assets, intellectual
property, prepaid expenses, accounts receivable and other assets primarily
related to the operation of the CE business. In addition, approximately 76 of
our employees, most of whom were associated with our CE business, accepted
employment with STMicroelectronics in connection with the asset sale. Pursuant
to the terms of the asset acquisition agreement, STMicroelectronics paid
approximately $55.6 million in cash consideration, of which $0.7 million is
being held by a third party in escrow for indemnification purposes until
September 2002. In connection with the asset sale, we granted to
STMicroelectronics certain non-exclusive rights to license and distribute
certain of our technology used in our IA products and our PC products. In
addition, we agreed not to compete in significant aspects of the CE market until
March 1, 2006. Revenues and gross

26
<PAGE>

                               AXEDA SYSTEMS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

margin for the CE business totaled approximately $0.4 million, or 15% of total
revenues, and $0.3 million, or 15% of total gross profit, respectively, for the
quarter ended March 31, 2001. These amounts are not necessarily indicative of
the results that would have been obtained for any future period.

Effective as of March 23, 2001, pursuant to an asset acquisition agreement dated
as of March 21, 2001, along with certain of our subsidiaries, we sold
substantially all of the assets, excluding inventory, related to our IA business
to Phoenix Technologies Ltd., a Delaware corporation, for $18 million in cash
consideration, of which $1.8 million was being held in escrow by a third party
for indemnification purposes until March 2002. In March 2002 we received $1.3
million, including interest of approximately $0.05 million. The remaining
balance of approximately $0.55 million has been withheld pending the settlement
of a claim submitted by Phoenix. We are unable to predict the resolution of this
matters, or reasonably estimate a range of possible loss g-iven the current
status of this matter. Any escrow amounts not returned to us will be recorded as
a charge to the gain on sale of assets in the period in which such determination
is made. The assets sold included certain of the contracts, equipment,
intangible assets, intellectual property, prepaid expenses and other assets
primarily related to the operation of the IA business. Under the asset
acquisition agreement, Phoenix Technologies purchased our e-Surfer embedded
software Internet browser and related hardware designs for the IA market. In
addition, in connection with this asset sale, 13 of our employees associated
with the IA business accepted employment with Phoenix Technologies. Revenues and
gross margin for the IA business totaled approximately $1 million, or 22% of
total revenues, and less than $0.1 million, or 2% of total gross profit,
respectively, for the quarter ended March 31, 2002. These amounts are not
necessarily indicative of the results that would have been obtained for any
future period. In the future, any revenue and gross margins, from this business
are expected to be nominal as inventory is either sold in the open market or
scrapped.

On December 7, 2001, we acquired all of the outstanding shares of eMation, Ltd.
("eMation"), pursuant to a share purchase agreement amended and restated as of
October 5, 2001, in consideration for: 8 million shares of our common stock;
options exercisable for up to 1,428,710 shares of our common stock in connection
with assumed eMation stock options, 530,000 of which are exercisable for $0.01
per share and the remaining 898,710 exercisable at $2.14 per share; options
exercisable for up to 113,600 shares of our common stock issued at closing
pursuant to our 1999 Stock Incentive Plan; and warrants exercisable for up to
7,000 shares of our common stock exercisable at $2.14 issued to ex-employees of
eMation in consideration for cancellation of outstanding options to purchase
shares of eMation. We also issued warrants at closing exercisable for up to
108,238 shares of our common stock with exercise prices ranging from $4.88 to
$21.51 per share to holders of warrants exercisable for shares of eMation. The
total combined value of the securities assumed and issued was approximately $20
million. Pursuant to the lock-up agreement executed by each selling eMation
shareholder, each shareholder agreed not to directly or indirectly transfer any
shares or rights relating to the shares of Axeda common stock received pursuant
to the share purchase agreement until the one year anniversary of the closing,
subject to certain exceptions. Axeda common stock issued and to be issued to the
selling eMation shareholders will not be registered at the time of issuance.

The acquisition was recorded under the purchase method of accounting. We
incurred transaction costs of approximately $3.4 million related to the eMation
acquisition and assumed approximately $5 million of eMation net debt. Prior to
the acquisition, we loaned a total of $4.3 million to eMation for working
capital purposes. We also paid sign-on bonuses of $0.3 million to

27
<PAGE>

                               AXEDA SYSTEMS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

three of eMation's executives. In connection with the acquisition, we expensed
$3.1 million of the purchase price as acquired in-process research and
development ("IPR&D") and recorded identifiable intangible assets and goodwill
of approximately $9.7 million and $20.8 million, respectively. In accordance
with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"), certain provisions of which were adopted
in 2001, we will no longer amortize goodwill, but instead will test it for
impairment at least annually and at the same time every year.

An aggregate of 1.6 million shares of our common stock issued in the eMation
acquisition has been deposited with a third party escrow agent to be held in
escrow to compensate us for certain losses and taxes that may arise as a result
of the eMation acquisition. The shareholders' agent appointed pursuant to the
share purchase agreement agreed to us submitting a claim on the escrow fund for
the return of 23,843 shares of our common stock in consideration for our
issuance of certain warrants at the closing. This escrow arrangement will expire
on December 7, 2002 and any shares remaining in escrow will be returned to
former eMation shareholders.

We believe that comparing different periods of our operating results is not
meaningful and you should not rely on the results for any previous period as an
indication of our future performance because our business model has changed
significantly since the sale of assets as described above and has further
changed with the acquisition of eMation.

In the quarter ending March 31, 2002, three customers ATi Technologies Inc.,
another customer and ABB, accounted for 14%, 4% and 2%, respectively, of our
total revenues and 4%, 14% and 8%, respectively, of our total gross profit. As
we continue to shift our strategic focus to our recently acquired DRM business,
we expect this trend to continue as early adopters of the DRM technology more
heavily influence our revenue results.

DRM

Since December 7, 2001, our main strategic focus has been the enterprise
software and services market. Our revenue recognition policy with respect to DRM
related licenses, maintenance agreements and services arrangements will remain
consistent with our current practice. Thus far, our DRM licensing arrangements
have consisted of up-front license fees accompanied by maintenance fees at a
fixed percentage with renewable annual amounts. To date we have not sold our DRM
license fees individually and therefore do not have vendor-specific objective
evidence of fair value ("VSOE") for this element. However, when offered with our
DRM maintenance, which we sell at a fixed percentage on an annual renewable
basis, we apply the provisions of Statement of Position 98-9, "Modification of
SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions."
Under this method, revenue is allocated to each delivered element using the
residual method based upon the fair value of the undelivered elements, which in
our case is the deferred maintenance. Revenues from license fees also consist of
fees paid on a per-unit basis for certain DRM products. In cases where we sell
our DRM products on a per-unit basis, revenues are recognized when the product
ships to an original equipment manufacturer ("OEM") or distributor. Services and
maintenance revenues consist of maintenance and support agreements, consulting
fees, and training. Prepaid maintenance fees are initially deferred and
recognized on a ratable basis over the one-year maintenance period. Services
revenues are recognized on a time and material basis.

28
<PAGE>

                               AXEDA SYSTEMS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

DIGITAL MEDIA BUSINESS

We license technology from Dolby Laboratories ("Dolby") for the audio format
that is used in a majority of our DVD-related products. We pay a royalty to
Dolby on a per-unit shipped basis. The technology, called Dolby Digital, permits
audio from a DVD to be routed to different speakers in a multi-speaker set up to
permit "theater-quality" audio. The Dolby Digital technology is part of the
industry standard DVD specification. In addition, we license encryption and
decryption software technology on a royalty-free basis from the Copy Control
Association ("CCA"), which must also be included in any DVD products we ship.
This technology is designed to prevent unauthorized persons from accessing DVD
content such as movies. The license for the encryption and decryption technology
may be terminated at any time. We may not be able to renew either license.

License revenues for our digital media products consist of either fees paid on a
per-unit basis, each time a manufacturer ships a product that incorporates our
software solutions, or may consist of flat fee arrangements, bulk license
purchases, or license grants. Services revenues consist of engineering fees from
PC, peripheral and semiconductor manufacturers for custom engineering services.
During the first quarter of 2001, we earned services revenues from CE
manufacturers for custom engineering. Services are generally billed on either a
time and material basis or on a project or contract basis. License revenues for
fees paid on a per-unit basis are recognized when earned, which is generally
based on receiving notification from a licensee detailing the shipments of
products incorporating our technology. In a number of cases, this occurs in the
quarter following the sale of the licensee's product to its customers. Our PC
license agreements generally have a term of one year or less and typically
require payment within 30 days after the end of the month or calendar quarter in
which the product is shipped. Some of our contracts may also require payment of
an up-front license fee. License fees paid in advance, with no further future
commitment, are recognized in the period that the license agreement is signed,
the fee is fixed or determinable, the technology is delivered and accepted and
collectibility is probable.

The amount and timing of some fixed fees could cause our operating results to
vary significantly from period to period due to the timing and number of
agreements, as well as the timing of the recognition of the associated revenues.
In cases where a fixed or lump-sum license fee is associated with the delivery
of multiple elements and VSOE cannot be established for the individual elements,
the entire fee from the arrangement is deferred until the earlier of the
establishment of VSOE or the delivery of all the elements of the arrangement. In
cases where a license grants a customer unspecified upgrade rights, the fixed or
lump sum license fee is deferred and recognized ratably over the term of the
arrangement. Billed amounts due from customers in excess of revenues recognized
are recorded as deferred revenues. Services revenues are recognized upon
delivery of the service in the case of time and material contracts or on a
percentage completion basis in the case of project-based contracts. Hardware
product sales are recognized upon shipment of the product to the manufacturer or
end user.

Our agreements with our PC customers are typically of limited duration and do
not contain minimum purchase commitments or are terminable with little or no
notice. Rather than long-term contracts, we typically enter into licensing
agreements with one-year terms or less that may automatically renew each
subsequent period unless either party receives a written cancellation. As a
result, many of our customers could elect not to renew these agreements and we
could have little warning of this election. Also, since our agreements with our
customers do not include minimum purchase requirements, the demand for our
products is unpredictable. As a result of

29
<PAGE>

                               AXEDA SYSTEMS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

competition or fluctuations in demand, we could be required to reach an
accommodation with our customers with respect to contractual provisions such as
price or delivery time in order to obtain additional business and maintain our
customer relationships. Any termination, decrease in orders or election not to
renew a contract by our principal customers would harm our business.

30
<PAGE>

                               AXEDA SYSTEMS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

RESULTS OF OPERATIONS

Three Months Ended March 30, 2002 Compared to Three Months Ended March 31, 2001.

The following table sets forth, for the periods indicated, the amount and
percentage of total revenues represented by certain items reflected in our
consolidated statements of operations:

<TABLE>
<CAPTION>
                               Axeda Systems Inc.
              Unaudited Consolidated Statements of Operations Data
                                 (In thousands)
                                                                       Three Months Ended March 31,
                                                             -------------------------------------------------
                                                                      2002                     2001
                                                             ----------------------    -----------------------
                                                                         Percentage                 Percentage
                                                              Amount    of Revenues     Amount     of Revenues
                                                             --------   -----------    --------    -----------
<S>                                                          <C>        <C>            <C>         <C>
Revenues:
   License...............................................    $  3,040         65.5%    $  2,363          84.0%
   Services and maintenance..............................         543          11.7         407           14.4
   Hardware..............................................       1,057          22.8          46            1.6
                                                             --------   -----------    --------    -----------
     Total revenues......................................       4,640         100.0       2,816          100.0
                                                             --------   -----------    --------    -----------

Cost of revenues:
   License...............................................       1,035          22.3         523           18.6
   Services and maintenance..............................         717          15.5          94            3.3
   Hardware..............................................       1,009          21.7          37            1.3
   Software amortization.................................         529          11.4           -              -
                                                             --------   -----------    --------    -----------
     Total cost of revenues..............................       3,290          70.9         654           23.2
                                                             --------   -----------    --------    -----------

Gross profit.............................................       1,350          29.1       2,162           76.8

Research and development
    Non-cash compensation................................          64           1.4       1,738           61.7
    Other research and development expense...............       2,232          48.1       2,407           85.5
Sales and marketing
    Non-cash compensation................................          19           0.4          69            2.4
    Other selling and marketing expense..................       4,802         103.5       3,492          124.0
General and administrative
    Non-cash compensation................................         860          18.5          64            2.3
    Other general and administrative expense.............       3,018          65.0       2,289           81.3
    Provision for doubtful accounts......................          45           1.0         126            4.5
Depreciation and amortization............................         310           6.7       1,666           59.2
                                                             --------   -----------    --------    -----------

Operating loss...........................................     (10,000)       (215.5)     (9,689)        (344.1)

Gains on sales of assets.................................           -             -      52,037        1,847.9
Interest (income) expense, and other (income) expense,
 net.....................................................        (220)         (4.7)       (366)         (13.0)
Income (loss) before provision for income taxes..........      (9,780)       (210.8)     42,714        1,516.8
Provision for income taxes (benefit).....................        (668)        (14.4)      2,979          105.8
                                                             --------   -----------    --------    -----------
Net income (loss)........................................    $ (9,112)       (196.4)%  $ 39,735        1,411.0%
                                                             ========   ===========    ========    ===========
</TABLE>

31
<PAGE>

                               AXEDA SYSTEMS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

Revenues. Total revenues increased by 65%, or $1.8 million, from $2.8 million
in the quarter ending March 31, 2001 to $4.6 million during the quarter ending
March 31, 2002. Sales from our DRM systems and Internet appliance inventories
added $2.5 million and $1.0 million, respectively, to our total revenues in the
quarter ended March 31, 2002 and were partially offset by decreases of $1.3
million and $0.4 million in our PC and CE businesses, respectively, over the
prior year. Revenues across our license, services and maintenance and hardware
streams increased $0.7 million, $0.1 million, and $1.0 million, respectively,
from the prior year. The overall increase in revenues was due to the inclusion
of our DRM solutions for the current quarter and increased sales of our
inventories.

License revenues increased by approximately $0.7 million from $2.4 million for
the quarter ended March 31, 2001 to $3.0 million for the quarter ended March 31,
2002. The increase was mainly attributable to the addition of sales of DRM
products of $2.0 million offset by a decrease in PC revenues of $1.3 million.
The $1.3 million decrease in PC revenues was mainly attributable to the loss of
a significant licensing customer from the prior year. In addition, decreases in
PC revenues from several PC OEM's of $0.8 million were offset by increases in
our web-based sales of PC products of $0.3 million and sales of our PC products
to a PC graphics component manufacturer of $0.5 million. We have licensed our
CineMaster DVD product ("CineMaster") to such PC graphics component manufacturer
on a per-unit basis since October 1, 2001 (see "Critical Accounting Policies").
The per-unit sales price of CineMaster to the customer now includes the cost of
Dolby technologies licensed by us from Dolby. The new agreement provided for a
royalty-free license for CineMaster, but not Dolby, for the quarter ended
December 31, 2001. In January 2002, we received a royalty report from the
customer detailing the customer's sales of CineMaster from October to December
2001 and the related amount of Dolby licensing fees due. Under the agreement
with the customer, the amount due from the customer for the Dolby royalties is
equal to our cost. Since we are obligated to collect and remit royalties to
Dolby for sales of our products incorporating Dolby technologies, our revenues
attributable to this customer now include the total sales price for the DVD
product sold to the customer, including the amount attributable to technologies
licensed by us from Dolby. The related cost of revenues includes the cost of the
Dolby royalties. As a result, there is no margin on the Dolby invoicing under
this arrangement for the three months ended March 31, 2002. Such amounts
included in license revenues and cost of license revenues totaled approximately
$0.6 million for the three months ended March 31, 2002. In the future we expect
license revenues to increase as software solutions related to our DRM system
products contribute to this revenue stream.

Hardware revenues increased by approximately $1.0 million for the quarter ended
March 31, 2002 from $0.05 million for the quarter ended March 31, 2001 due to
increased sales of components related to Internet appliances, and, to a lesser
extent, Internet set-top boxes. We expect hardware revenues and related gross
profit to be minimal as we continue to dispose of our current inventories.

Services and maintenance revenues increased 33% from $0.4 million for the
quarter ended March 31, 2001 to $0.5 million for the quarter ended March 31,
2002. The increase was attributable to

32
<PAGE>

                               AXEDA SYSTEMS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

services and maintenance plans sold with our DRM system products, which
contributed $0.5 million during the quarter ended March 31, 2002, offset by a
decrease in services of $0.4 million associated with our former CE business,
which was sold to STMicroelectronics in March 2001.

Historically, the majority of our revenues have been derived from a small number
of customers. For the quarter ended March 31, 2002, our top three customers,
comprised of an IA, PC and DRM customer, including a materials broker, a PC
graphics component manufacturer and a manufacturer of high-speed digital
printers, respectively, accounted for $1.6 million or 34% of our total revenues.
In the quarter ended March 31, 2001, two customers accounted for 62% of our
total revenues. In the future, we expect our revenues to be less concentrated as
sales of our enterprise software and services span a wider customer base and we
expect early adopters of our DRM solutions to increase our revenues.

We sell our DRM system solutions to Global 2000 companies in the industrial and
building automation, high technology devices, medical instrumentation,
semiconductor equipment, and office automation industries. In the quarter ended
March 31, 2002 companies based in North America accounted for 59% of our
revenues. In the future we expect a greater portion of our revenues to be
derived outside of North America.

Cost of Revenues. Cost of revenues increased $2.6 million or 403% from $0.7
million for the quarter ended March 31, 2001 to $3.3 million for the quarter
ended March 31, 2002. Cost of revenues relating to our license, services and
maintenance and hardware revenues increased approximately $0.5 million, $0.6
million, and $1.0 million, respectively, from the prior year. In addition, we
are amortizing developed and core technologies, acquired in the eMation
acquisition, which added $0.5 million to our cost of revenues for the quarter
ended March 31, 2002.

The $0.5 million increase in cost of license revenues over the prior year is due
to an additional $0.3 million in costs associated with our DRM solution and a
net increase of $0.2 million for our PC products. The net increase in our PC
cost of license revenues was due to the new license arrangement we have with a
PC graphics component manufacturer, as previously described (see "Revenues,"
above), and increases in Dolby royalty rates due to reduced sales of products
incorporating Dolby, offset by decreases in Dolby fees in total, attributable to
lower sales of our PC products. The increase of $1.0 million in cost of hardware
revenues corresponds directly to the increase in our hardware sales. The $0.6
million increase in cost of services and maintenance is attributable to the $0.7
million increase from our DRM system services and maintenance plans for the
quarter ended March 31, 2002, offset by a $0.1 million decrease in services
related to our former CE business. We expect our cost of revenues related to
licenses as a percentage of license revenues to decrease in the future as our
license revenues shift more to our DRM products. The addition of non-cash
amortization of acquired technology will partially offset this future decrease
in cost of revenues as a percentage of total revenues, and will represent
approximately $2.1 million of our cost of revenues for the year ending December
31, 2002.

Gross Profit. Gross profit decreased by $0.8 million, or 38%, from $2.2 million
for the quarter ended March 31, 2001 to $1.4 million for the quarter ended March
31, 2002. The decrease is attributable to negative gross profit from services
and maintenance due to our building of the organization and the large number of
non-billable proofs of concepts delivered to prospective customers during the
quarter, the sale of the assets of our CE business in March 2001 and a less
favorable mix of licensing products in our PC business. Excluding software
amortization during the quarter ended March 31, 2002, gross profit decreased
from $2.2 million to $1.9 million.

33
<PAGE>

                               AXEDA SYSTEMS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

For the quarter ended March 31, 2002, 66% of our total revenues were derived
from licenses, and 12% from services and maintenance, in comparison to 84% and
14%, respectively, in 2001. Historically the gross profit percentage from
license revenues and services revenues is higher than that from hardware sales.
As a percentage of total revenues, gross profit, excluding the charges recorded
for software amortization, decreased from 77% for the quarter ended March 31,
2001 to 40% for the quarter ended March 31, 2002, due to negative gross profit
from our services and maintenance operations due to our expansion of these
operations in the first quarter of 2002 and the large number of non-billable
proofs of concepts delivered to prospective customers during the quarter, the
sale of the assets of our CE business in March 2001 and a less favorable mix of
licensing products in our PC business. Excluding the significant PC customer
from the prior year, gross profit for the quarter ended March 31, 2001 would
have been 58%. Gross profit from our DRM products, excluding non-cash software
amortization, for quarter ending March 31, 2002 was 60%.

Research and Development Expense. Other research and development expenses
consist of staff, staff-related, professional and other development related
support costs associated with the development of new products, customization of
existing products for customers, quality assurance and testing. Research and
development expenses decreased 7%, from $2.4 million for the quarter ended March
31, 2001 to $2.2 million for the quarter ended March 31, 2002.

The decrease in research and development expenses was due to the elimination of
the CE and IA development teams in the first quarter of 2001, which contributed
approximately $0.7 million and $0.8 million, respectively, to the decrease. In
addition reductions in the PC development team contributed approximately $0.2
million to the decrease. These decreases however, were primarily offset by
increases in staff expenses related to the addition of the DRM development team
of approximately $1.5 million. As a percentage of total revenues, other research
and development expenses decreased from 86% to 48%. The decrease in research and
development expenses as a percentage of total revenues resulted from higher
revenues and reduced research and development expenses. We expect research and
development expenses to increase in 2002 as we continue to invest in product
development for our enterprise software and services offerings.

Non-cash Compensation Research and Development Expense. Non-cash research and
development expense consists of compensation related to stock options. Non-cash
research and development expense decreased 96% from $1.7 million for the quarter
ended March 31, 2001 to $0.1 million for the quarter ended March 31, 2002. The
decrease of $1.6 million from the prior year is mainly due to the immediate
recognition in March 2001 of the prepaid and deferred stock compensation, that
would have otherwise vested on a monthly or quarterly basis through September
2003, related to reductions in staffing in connection with the closing of our
Vancouver office in March 2001. No similar expense was recorded in the first
quarter of 2002.

Sales and Marketing Expense. Other selling and marketing expenses consist of
salaries, travel expenses and costs associated with trade shows, advertising and
other marketing efforts, as well as technical support costs. Selling and
marketing expenses increased $1.3 million or 38% from $3.5 million for the
quarter ended March 31, 2001 to $4.8 million for the quarter ended March 31,
2002.

The increase in sales and marketing expense is attributable to the inclusion of
the eMation sales

34
<PAGE>

                               AXEDA SYSTEMS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

and marketing team and the addition of our new professional services group,
which contributed $3.0 and $1.2 million, respectively, to the increase for the
quarter ended March 31, 2002. Partially offsetting this increase was the
elimination of the sales and marketing teams associated with our CE and IA
businesses, which resulted in decreases of $0.4 million and $0.5 million,
respectively, for the quarter ending March 31, 2002. Decreases of approximately
$1.8 million relating to the settlement of a South American distribution rights
agreement and $0.2 million from reduced staff in the PC sales teams also
partially offset the increase. As a percentage of total revenues, sales and
marketing expenses decreased from 124% to 104%, due to increased revenues. We
expect sales and marketing expenses to increase in 2002 as we continue to invest
in our sales force for our enterprise software and services offerings.

Non-cash Compensation Sales and Marketing Expense. Non-cash sales and marketing
expense consists of compensation related to stock options. Non-cash sales and
marketing expense decreased $0.05 million or 72% to $0.02 million for the
quarter ended March 31, 2002. The decrease is the result of the sale of the
assets of the IA business in March 2001.

Other General and Administrative Expense. Other general and administrative
expenses consist of staff, staff related, and support costs for our finance,
human resources, information systems and other management departments. Other
general and administrative expenses increased $0.7 million or 32% from $2.3
million for the quarter ended March 31, 2001 to $3.0 million for the quarter
ended March 31, 2002. As a percentage of total revenues, other general and
administrative expenses decreased from 81% to 65% of total revenues due to the
proportionally larger increase in total revenues.

The increase in other general and administrative expenses was mainly due to the
addition of the eMation general and administrative function, which contributed
$1.0 million to the increase. Partially offsetting this increase was a $0.3
million decrease relating to reduced rent expense for $0.2 million related to
our Malvern facility, and other general and administrative expenses
approximating $0.1 million. We expect general and administrative expenses to
decrease in 2002 as we focus on our infrastructure needs and reduce unnecessary
overhead expenses.

Non-cash Compensation General and Administrative Expense. Non-cash general and
administrative expense consists of amortization of compensation related to stock
options. Non-cash general and administrative expense increased from $0.1 million
for the quarter ended March 31, 2001 to $0.9 million for the quarter ended March
31, 2002. The increase is attributable to a $0.4 million expense incurred for
the acceleration of option vesting in accordance with certain employment
agreements. In addition, $0.2 million of the increase is the result of
amortization of deferred compensation recorded in connection with stock options
granted to employees at less than fair market value granted between July and
December 2001. The remaining portion of the increase is attributable to a
one-time charge of $0.2 million for the modification of stock options held by a
former employee.

Provision for Doubtful Accounts. The provision for doubtful accounts represents
management's best estimate of the doubtful accounts for each period. The
provision decreased 64% or $0.1 million for the quarter ended March 31, 2002. As
a percentage of revenues, the provision decreased from 5% to 1% for the quarters
ended March 31, 2001 and 2002, respectively, as a result of continued improved
credit and collection efforts and increased

35
<PAGE>

                               AXEDA SYSTEMS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

revenues.

Depreciation and Amortization. We recorded depreciation and amortization of
$0.3 million for the quarter ended March 31, 2002, compared to $1.7 million for
the quarter ended March 31, 2001. The sales of the assets of our CE and IA
businesses, both of which were sold in March 2001, contributed $1.2 million of
the decrease, while the impairment of our Cinax goodwill in December 2001
accounted for $0.3 million of the decrease. Offsetting these decreases was an
increase of approximately $0.1 million attributable to depreciation of assets
acquired in the purchase of eMation. On a quarterly basis, we expect
depreciation and amortization expense to be approximately the same for the
balance of the year ended December 31, 2002.

Under SFAS No. 142, goodwill acquired in a business combination after June 30,
2001 is no longer amortized. The provisions of SFAS No. 142 require that
goodwill be tested for impairment on an annual basis at the same time every
year. Accordingly, we have not recorded amortization expense in 2002 for
goodwill of approximately $20.8 million acquired in our purchase of eMation in
December 2001. Intangible assets acquired in a business combination and
recognized as an asset apart from goodwill must arise from contractual or other
legal rights or otherwise are separable. Under SFAS No. 142, recognized
intangible assets with finite useful lives are amortized over the period which
the assets are expected to contribute directly or indirectly to the our future
cash flows. We recorded identified intangible assets totaling approximately $9.7
million in connection with our purchase of eMation, comprised of developed and
core technologies of approximately $1.4 million and $7.0 million, respectively,
patent applications of approximately $1.0 million and customer base of
approximately $0.3 million. The developed and core technologies are being
amortized over their estimated useful lives of 2 and 5 years, respectively, and
are recorded as cost of revenues, which totaled $0.5 million for the quarter
ended March 31, 2002. The patent applications and customer base are being
amortized over their estimated useful lives of 5 years and are included with
operating expenses, which totaled approximately $0.1 million for the quarter
ended March 31, 2002.

Gains on Sales of Assets. We recorded a gain of approximately $47.5 million for
the quarter ended March 31, 2001 as a result of the sale of the assets related
to our CE business in March 2001. We recorded a gain of approximately $4.5
million for the quarter ended March 31, 2001 as a result of the sale of assets
related to our IA business in March 2001.

Interest (Income) and Expense, Net and Other, net. Net interest income decreased
by $0.1 million, or 40%, for the quarter ended March 31, 2002 compared to the
comparable period in 2001. The decrease is the result of lower bank interest
rates in 2002.

Provision for Income Taxes (Benefit). The income tax benefit recorded for the
quarter ended March 31, 2002 is attributable to the reversal of certain prior
year U.S. income tax accruals no longer necessary as a result of newly enacted
tax legislation in 2002.

ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT

In connection with the acquisition of eMation, we expensed $3.1 million of the
purchase price as IPR&D. The potential income streams were discounted using a
15%-25% discount rate for risks, probabilities and uncertainties, including the
stage of development of the technology, viability of target markets, and other
factors.

36
<PAGE>

                               AXEDA SYSTEMS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

As of the acquisition date, eMation was conducting ongoing research and
development into its next generation DRM product, as well as enhancing its
WizFactory and @aGlance industrial products. Due to the significant
technological risks relating to the development of these products and the fact
that the products were not completed at the time of the acquisition, the work
effort estimated to bring these products to market was considered in-process
research and development. These development efforts are expected to include
product enhancements and enable the products to perform on an increased number
of platforms. The completion date for these particular initiatives is expected
in 2002, and they are expected to generate revenue through 2004.

LIQUIDITY AND CAPITAL RESOURCES

We financed our operations up until 2001 primarily through the issuance and sale
of debt and equity securities to investors including our initial public offering
completed on July 16, 1999. Since March 2001, our operations have also been
financed through the sales of the assets of our CE and IA businesses. As of
March 31, 2002, we had approximately $36.5 million in cash and cash equivalents,
including $1.3 million of the proceeds from the sales of the assets of our CE
and IA businesses in March 2001 held in escrow by third parties for
indemnification purposes. The remaining balance held in escrow for the IA sale
of approximately $0.55 million has been withheld pending the settlement of a
claim submitted by Phoenix. We are unable to predict the resolution of this
matter, or reasonably estimate any amount of possible loss given the current
status of this matter. Any escrow amounts not returned to us will be recorded as
a charge to the gain on sale of assets in the period in which such determination
is made.

Net cash used in operating activities for the quarter ending March 31, 2002 was
$8.9 million. Cash used in operating activities for this period was primarily
the result of our net loss of approximately $9.1 million, adjusted for other
non-cash charges, including non-cash compensation and depreciation and
amortization totaling approximately $1.8 million, and less other changes in
working capital of approximately $1.5 million. Net cash used in operating
activities for the quarter ended March 31, 2001 was $8.0 million. Cash used in
operating activities for this period was primarily the result of net losses,
adjusted for non-recurring gains of approximately $52.0 million and non-cash
compensation expense and depreciation and amortization totaling approximately
$3.1 million.

Net cash used in investing activities for the quarter ending March 31, 2002 was
$0.2 million, and consisted of purchases of furniture and equipment. Net cash
provided by investing activities for the quarter ended March 31, 2001 was
approximately $67.9 million and consisted primarily of the net proceeds from the
sales of assets of our CE and IA businesses of approximately $68.1 million,
offset by purchases of furniture and equipment of approximately $0.2 million.

In March 2001, we completed the sale of the assets of our CE business to
STMicroelectronics and received approximately $55.6 million in cash
consideration, of which $0.7 million is being held by a third party in escrow
for indemnification purposes until September 2002.

In March 2001, we sold the assets of our IA business, excluding inventory, to
Phoenix Technologies for $18 million in cash consideration, of which $0.55
million remains withheld by a third party pending the settlement of a claim
submitted by Phoenix.

Net cash used in financing activities was $1.7 million for the quarter ending
March 31, 2002 and consisted of the repayment of the balance of $1.65 million
under the line of credit acquired in the

37
<PAGE>

                               AXEDA SYSTEMS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

acquisition of eMation and principal payments of the equipment line of credit to
EVP of approximately $0.1 million. Net cash provided by financing activities for
the quarter ended March 31, 2001 was nominal.

As of March 31, 2002, the we had approximately $0.5 million outstanding on an
equipment line of credit with European Venture Partners ("EVP") with interest
rates ranging from 12% to 13% and payments due monthly over a 36 month period.
The line of credit was available to finance purchases of capital equipment until
September 30, 2001. In connection with the agreement, EVP has a senior security
interest in substantially all of eMation's capital equipment. In addition, the
line of credit agreement requires the us to provide EVP with copies of quarterly
financial statements within 45 days of the end of each quarter and audited
annual financial statements within 90 days of the end of each year as well as
other information and notifications regarding eMation's financial and operating
results. As of March 31, 2002, we were in compliance with all of our covenants
to EVP.

A portion of our liability for severance pay is calculated pursuant to Israeli
severance pay law based on the most recent salary of the employees multiplied by
the number of years of employment, as of the balance sheet date. Employees are
entitled to one month's salary for each year of employment or a portion thereof.
The liability for all of our employees is fully provided by monthly deposits
with insurance policies and by an accrual, totaling approximately $0.5 million.
The aggregate value of these policies is approximately $0.3 million. The
deposited funds may be withdrawn only upon the fulfillment of the obligation
pursuant to Israeli severance pay law or labor agreements. The value of the
deposited funds is based upon the cash surrender value of these policies.

In May 2002, we entered in to a lease for approximately 35,000 square feet of
space in an office building in the same business park as our current offices
located in Mansfield, Massachusetts. This facility is leased at an average
annual rental of approximately $500,000, including operating expenses, utilities
and taxes, and will be used for research and development, sales and support and
administrative activities. The lease commences in June 2002 and expires in July
2007.

We have obtained an irrevocable, cash-secured, standby letter of credit (the
"letter of credit") from a bank as security and for the benefit of the lessor
for $0.15 million. The letter of credit expires in August 2003 and provides for
automatic one-year renewals, but not beyond August 2007. The letter of credit is
secured by a certificate of deposit for $0.15 million from the same bank, and
also expires in August 2003. This amount is restricted for withdrawal and will
be included in non-current assets in our consolidated balance sheets through
August 2002.

We maintain approximately 9,000 square feet of office space in Marlborough,
Massachusetts under an operating lease, which is no longer used for operating
purposes. The lease requires annual rental payments totaling approximately $0.2
million and expires in February 2009. The present value of the future lease
payments, discounted at 5%, of approximately $1.1 million was accrued by eMation
as of the date of acquisition and the balance as of March 31, 2002 is
approximately $1.0 million.

Although we have no material commitments for capital expenditures, we anticipate
minimal increases in our capital expenditures as our needs in operations,
infrastructure and personnel arise.

In September 2001, our Board of Directors authorized a stock repurchase program
to acquire up to $10 million worth of shares of our common stock. The shares may
be purchased from time to time at prevailing market prices through open market
or unsolicited negotiated transactions, depending upon market conditions. From
September 2001 to December 2001, we repurchased 383,800 shares for an aggregate
cost of approximately $0.6 million including commissions, at an average market
price per share of approximately $1.58. No shares were repurchased in the
quarter ending March 31, 2002.

38
<PAGE>

                               AXEDA SYSTEMS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

We believe that our current cash and cash equivalents balance and cash
anticipated to be provided by operations, if any, will be adequate to meet our
cash needs through 2003.

CRITICAL ACCOUNTING POLICIES

In December 2001 the SEC issued Financial Reporting Release No. 60, "Cautionary
Advice Regarding Disclosure About Critical Accounting Policies" ("FRR 60"),
suggesting companies provide additional disclosure and commentary on those
accounting policies considered most critical. FRR 60 considers an accounting
policy to be critical if it is important to our financial condition and results,
and requires significant judgment and estimates on the part of management in its
application. We believe the following represent our critical accounting policies
as contemplated by FRR 60. For a summary of all of our significant accounting
policies, including the critical accounting policies discussed below, see note 1
to the accompanying consolidated financial statements.

We believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements.

Revenue recognition. We derive our revenues from primarily two sources (i)
product revenue, which includes software license, hardware and royalty revenue,
and (ii) services and support revenue which includes software license
maintenance, training, and consulting revenue. As described below, significant
management judgments and estimates must be made and used in connection with the
revenue recognized in any accounting period. Material differences may result in
the amount and timing of our revenue for any period if our management made
different judgments or utilized different estimates.

We license our software products generally on a perpetual basis. Some of our
licenses include maintenance and support, which typically are for periods of one
year.

We apply the provisions of Statement of Position 97-2, "Software Revenue
Recognition," ("SOP 97-2") as amended by Statement of Position 98-9
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions" ("SOP 98-9") to all transactions involving the sale of software
products. For hardware transactions where no software is involved, we apply the
provisions of Staff Accounting Bulletin 101 "Revenue Recognition" ("SAB 101").

We recognize revenue from the sale of software licenses when persuasive evidence
of an arrangement exists, the product has been delivered, the fee is fixed and
determinable and collection of the resulting receivable is reasonably assured.
Delivery generally occurs when product is delivered to a common carrier. If a
significant portion of a fee is due after our normal payment terms, we account
for the fee as not being fixed and determinable. In these cases, we recognize
revenue as the fees become due.

We assess collection based on a number of factors, including the transaction
history and the credit-worthiness of the customer. If we determine that
collection of a fee is not reasonably assured, we defer the fee and recognize
revenue at the time collection becomes reasonably assured, which is generally
upon receipt of cash.

39
<PAGE>

                               AXEDA SYSTEMS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

For all sales, except those completed over the Internet, we use either a binding
purchase order or a signed agreement as evidence of an arrangement. For sales
over the Internet, we utilize a third party distributor to process our
transactions. Sales through our distributors are evidenced by a master agreement
governing the relationship together with binding purchase orders on a
transaction-by-transaction basis.

For multiple-element arrangements that are not accounted for using long-term
contract accounting (for example, undelivered maintenance and support), we
allocate revenue to the delivered elements of the arrangement using the residual
value method when there is VSOE for each of the undelivered elements. We defer
revenue from the arrangement fee equivalent to the fair value of the undelivered
elements and the difference between the total arrangement fee and the amount
deferred for the undelivered elements is recognized as revenue related to the
delivered elements. The fair value of DRM maintenance and postcontract customer
support ("PCS") obligations is based upon separate sales of renewals to other
customers or upon renewal rates quoted in the contracts. The fair value of DRM
services, such as training or consulting, is based upon separate sales by us of
these services to other customers.

Our arrangements do not generally include acceptance clauses. However, if an
arrangement includes an acceptance provision, acceptance occurs upon the earlier
of receipt of a written customer acceptance or expiration of the acceptance
period.

In cases where we engage a third party warehouse or distributor to sell any of
our inventory on consignment, and collectibility is not probable, revenue is not
recognized and inventory is not reduced until cash from the sale is received. In
certain consignment arrangements with distributors, if the period under which a
right to return has expired with no physical return of the inventory, the
inventory is considered sold, assuming all other criteria in SAB 101 are met.

We recognize revenue for maintenance services ratably over the contract term.
Our training and consulting services are billed based on hourly rates, and we
generally recognize revenue as these services are performed. However, if our
services are bundled with a license component and the arrangement requires us to
perform significant work either to alter the underlying software or to build
additional complex interfaces so that the software conforms to the customer's
requirements, we recognize the entire fee using the percentage of completion
method. We estimate the percentage of completion based on the costs incurred to
date as a percentage of the estimated total costs to complete the project.
During our analysis if the work effort to complete a project exceeds our revenue
projections, a loss on the project is immediately recognized.

Provision for doubtful accounts. Management must make estimates of the
uncollectability of our accounts receivables. Management specifically analyzes
accounts receivable and analyzes historical bad debts, customer concentrations,
customer credit-worthiness, current economic trends and changes in our customer
payment terms when evaluating the adequacy of the allowance for doubtful
accounts. Our accounts receivable balance was $4.7 million, net of allowance for
doubtful accounts of $0.2 million as of March 31, 2002.

Valuation of inventories. We assess the value of our inventories on a periodic
basis based upon numerous factors including expected product or material demand,
current market conditions, technological obsolescence, current cost and net
realizable value. In cases where any of these factors adversely affects our
ability to realize the carrying value of our inventories, an inventory reserve
is recorded. Because the timing and magnitude of these changes to inventories
are

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                               AXEDA SYSTEMS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

difficult to predict, changes to our inventories' value may occur unexpectedly.
Given our inventories balance was $0.3 million net of reserves as of March 31,
2002, we do not believe any unanticipated events will have a material impact
upon the realization of the inventories' carrying value.

Valuation of long-lived and intangible assets and goodwill. We assess the
impairment of identified intangible assets, long-lived assets and related
goodwill whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Factors we consider important which could trigger
an impairment review include the following:

     . significant underperformance relative to expected historical or projected
       future operating results;

     . significant changes in the manner of our use of the acquired assets or
       the strategy for our overall business;

     . significant negative industry or economic trends;

     . significant decline in our stock price for a sustained period; and o our
       market capitalization relative to net book value.

When we determine that the carrying value of identified intangible assets,
long-lived assets and related goodwill may not be recoverable based upon the
existence of one or more of the above indicators of impairment, we measure any
impairment based on a projected discounted cash flow method using a discount
rate determined by our management to be commensurate with the risk inherent in
our current business model. Net identified intangible assets, long-lived assets,
and goodwill amounted to $32.3 million as of March 31, 2002 and $32.9 million as
of December 31, 2001.

SFAS No. 142, which was effective January 1, 2002, requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with finite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144, beginning in 2002 and annually thereafter. As a
result, we are not amortizing approximately $20.8 million of goodwill recorded
in 2001. We adopted certain provisions of SFAS No.142, as required in the
transition guidance contained therein, in 2001 and adopted the remaining
provisions on January 1, 2002.

On January 1, 2002, we adopted SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"), which supersedes certain provisions
of APB Opinion No. 30 "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" ("APB 30"), and supersedes SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121"). There was no adjustment required upon
adoption of SFAS 144. In accordance with SFAS 144, we evaluate long-lived
assets, including intangible assets other than goodwill, for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable based on expected undiscounted cash flows attributable to
that asset. The amount of any impairment is

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                               AXEDA SYSTEMS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

measured as the difference between the carrying value and the fair value of the
impaired asset. We do not have any long-lived assets that we consider to be
impaired.

Contingencies. Management's current estimated range of liability related to its
pending legal claims is based on claims for which our management can estimate
the amount and range of loss. We have recorded our best estimate of the
liability related to those claims, where there is a range of loss. Because of
the uncertainties related to both the amount and range of loss on the remaining
pending legal claims, management is unable to make a reasonable estimate of the
liability that could result from an unfavorable outcome. As additional
information becomes available, we will assess the potential liability related to
our pending legal claims and revise our estimates. Such revisions in our
estimates of the potential liability could materially impact our results of
operations, financial position and cash flows.

RECENT ACCOUNTING PRONOUNCEMENTS

On April 30, 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"). The Statement updates, clarifies and simplifies
existing accounting pronouncements. This Statement also makes technical
corrections to existing pronouncements. While those corrections are not
substantive in nature, in some instances, they may change accounting practice.

We do not expect the adoption of SFAS 145 to have a significant impact on our
results of operations, financial position or cash flows.

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                               AXEDA SYSTEMS INC.

ITEM 3:

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We develop products in the United States and in Israel and sell such products in
North America, Asia and various countries in Europe. We collect a portion of our
revenues and pay a portion of our operating expenses in foreign currencies. As a
result, our financial results could be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
Currently, we do not use derivative instruments to hedge our foreign exchange
risk, although we may do so in the future. Our interest income is sensitive to
changes in the general level of U.S. interest rates, particularly since the
majority of our investments are in short-term instruments. Due to the nature of
our short-term investments, we have concluded that there is no material market
risk exposure. Therefore, no quantitative tabular disclosures are required.

FACTORS THAT MAY AFFECT FUTURE RESULTS

Our business and the value of our shares is subject to numerous risks. Some of
these risks are described above and certain additional risks are described
below. You should carefully consider the risks described below, in addition to
the other information contained in this Report and in our other filings with the
SEC. The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also affect our business operations. If any of
these risks actually occur, our business, financial condition or results of
operations could be seriously harmed. In that event, the market price for our
common stock could decline and you may lose part or all of your investment.

We have never been profitable and may never achieve profitability in the future

We had a net loss from operations of approximately $10.0 million for the quarter
ended March 31, 2002. To date, we have not achieved operating profitability on
an annual basis.

We have invested and continue to invest significant resources in product
development, selling and marketing, services, professional services and support
and administrative expenses. To achieve profitability, we will need to increase
revenues significantly. We cannot assure you that our revenues will grow or that
we will achieve or maintain profitability in the future.

We are currently undergoing a business transition that may adversely affect our
Company

We sold the assets of our CE business and our IA business in March 2001. As part
of these sales, approximately 89 of our employees accepted employment with
either STMicroelectronics or Phoenix Technologies. These employees were
dedicated primarily to research and development activities in the digital media
market. The reduction in our research and development workforce has adversely
affected our ability to offer new products in the digital media market. The
reduction in our sales force adversely affected our ability to sell our digital
media products. These sales negatively impacted relationships with our partners,
distributors and customers in the digital media market and left us with a
limited digital media offering of products that could be used only in personal
computers. Pursuant to the terms of our agreement with STMicroelectronics, we
may not participate in significant aspects of the CE market prior to March 2006.
As a result, we are subject to economic pressures that adversely affect our
ability to compete in the digital media market.

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                               AXEDA SYSTEMS INC.

In December 2001, we announced the completion of the eMation acquisition. Our
focus on the DRM business will present challenges different from those presented
by the digital media business. We cannot assure you that our management team
will be successful in managing this new business. If we are unable to
successfully operate the DRM business, our business and operating results will
be adversely affected.

We are seeking strategic alternatives for our digital media business.

Our future success depends upon the acceptance of our DRM solution

We expect our future growth to be increasingly driven by our DRM products and
services. We have limited experience in this market. We acquired eMation in
December 2001. eMation was founded in 1988 and historically derived its main
source of revenue from its industrial automation products.

We generated revenues of approximately $2.5 million, or 54% of our total
revenues, from DRM products and services for the quarter ending March 31, 2002.
For the quarter ending March 31, 2001 eMation as a stand-alone entity generated
sales of DRM products and services totaling $2.6 million

Factors adversely affecting the pricing of or demand for our DRM products, such
as competition and technological change, could have a material adverse effect on
our business, financial position and results of operations. If our DRM products
do not achieve market acceptance or if competitors release new products that
achieve greater market acceptance, have more advanced features, offer better
performance or are more price-competitive, revenues from our DRM products may
not grow as expected.

Our DRM products will involve significant capital expenditures by our customers.
We have a limited history of selling DRM products and will have to devote
substantial resources to educate prospective customers about the benefits of our
DRM products. Even if our DRM products are effective in reducing our customers'
costs or in providing our customers with new revenue sources, our target
customers may not choose them for technical, cost, support or other reasons. If
the market for our products fails to grow or grows more slowly than we
anticipate, our business will suffer.

We may not be able to successfully make or integrate acquisitions of other
companies

We have in the past and intend in the future to continue to acquire businesses.
Acquisitions are particularly difficult to assess because of rapidly changing
technological standards. If we are unable to successfully integrate
acquisitions, our business could suffer. We may be subject to various risks as a
result of the eMation acquisition and other future acquisitions of this type,
including:

..    the possibility that the business cultures may not mesh;

..    interruption of the operations of the combined businesses;

..    the possibility that management may be distracted from regular business
     concerns by the need to integrate operations or operate the businesses
     separately which may result in

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                               AXEDA SYSTEMS INC.

     interruption of the operations of the combined businesses;

..    problems in retaining employees;

..    challenges in retaining customers;

..    anticipated and unanticipated costs relating to additional administrative
     or operating expenses of each business; and

..    the potential inability to maintain uniform standards, controls, procedures
     and policies.

Our historical financial information is of limited value in projecting our
future operating results or evaluating our operating history

We believe that comparing different periods of our operating results is not
meaningful and you should not rely on the results for any previous period as an
indication of our future performance because our business model has changed
significantly since inception and has further changed with the acquisition of
eMation.

You should expect our quarterly operating results to fluctuate in future periods
and they may fail to meet the expectations of investors, which could cause our
stock price to decline.

Our operating results have varied widely in the past, and we expect that they
will continue to vary significantly as we attempt to establish our products in
the DRM market and transition to a new business model. Furthermore, our revenues
and operating results will vary significantly from quarter-to-quarter due to a
number of additional factors, including:

..    variations in demand for our products and services, which are relatively
     few in number;

..    customers' decisions to defer or accelerate orders for our products or
     services;

..    capital budgeting and purchasing cycles of current and prospective
     customers may cause our sales to be seasonal; it is difficult for us to
     evaluate the degree to which this seasonality may affect our business;

..    the timing of large contracts that materially affect our operating results
     in a given quarter;

..    delays in introducing new products and services;

..    changes in our pricing policies or the pricing policies of our competitors;

..    the costs of litigation and intellectual property protection;

..    our ability to develop and attain market acceptance of enhancements to our
     products;

..    new product introductions by competitors;

..    the mix of license and services revenues;

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                               AXEDA SYSTEMS INC.

..    unanticipated customer demands which impact our ability to deliver our
     products and ultimately recognize revenues;

..    the mix of domestic and international sales;

..    costs related to the acquisition of technologies or businesses;

..    our ability to attract, integrate, train, retain and motivate sales and
     marketing, research and development, administrative and product management
     personnel;

..    our ability to expand our operations; and

..    global economic conditions as well as those specific to the industries we
     operate in.

We determine our operating expenses largely on the basis of anticipated revenue
trends and a high percentage of our expenses are fixed in the short term and are
significant. As a result, any delay in generating or recognizing revenues could
cause significant variations in our operating results from quarter-to-quarter
and could result in substantial operating losses.

Due to the foregoing factors, we believe that quarter-to-quarter comparisons of
our operating results are not a good indication of our future performance. In
future quarters, our operating results may be below the expectations of
investors. In this event, the price of our common stock may fall significantly.

We may not be able to compete effectively

Competition in the market for DRM solutions is emerging and expected to grow
stronger. If we are unable to compete effectively, the demand for, or the prices
of, our products may be reduced. To maintain and improve our competitive
position, we must continue to develop and introduce, on a timely and
cost-effective basis, new products, features and services that keep pace with
the evolving needs of our customers. The principal competitive factors that
affect our performance in the DRM market are the following:

..    our ability to effectively market and sell our products;
..    our customer service and support;
..    our product reputation, quality, performance; and
..    the price and features of our products such as adaptability, scalability,
     the ability to integrate with other products, functionality, and ease of
     use.

We compete in a market with companies that may utilize varying approaches to
enable the remote management of information from intelligent devices. The
principal competitors to the Axeda DRM System today are in-house developers
within the machine and device manufacturers that are our prime sales targets or
systems integrators doing custom product development. These companies may choose
to deploy their own information technology personnel or utilize system
integrators to write new code or rewrite existing applications in an effort to
develop their own information extraction solutions. As a result, prospective
clients may decide against purchasing and implementing externally developed
software and, instead, may develop their own solutions similar to our DRM
solutions. Some vertical market solution suppliers have also developed device
management infrastructures for use in specific industries. Today companies such
as

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<PAGE>

                               AXEDA SYSTEMS INC.

Brooks Automation (semiconductor), Questra (medical and office), Invensys
(industrial), Imaging Portals (copiers), Motive (computers), eVend.Net (vending)
and WindRiver (home) compete in specific industries that we operate in.

We expect competition to intensify as the DRM market matures. We expect that
competition will increase in the near term and that our primary long-term
competitors may not yet have entered the market. Our future competitors may have
significantly more personnel or greater financial, technical, marketing and
other resources than either our current competitors or we do. Futhermore, our
future competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements than we can. Also, future
competitors may have greater name recognition and more extensive customer bases
that they can leverage. Increased competition could result in price reductions,
fewer customer orders, reduced gross profit margins and loss of market share any
of which could harm our business.

   We expect to see new or increased competition from several areas, including:

..     Device Networking--The embedded networking companies are perhaps the most
     visible infrastructure companies in this emerging market. We do not develop
     networking protocols and our technology generally can work with any open or
     proprietary communications protocols. We therefore today see
     device-networking companies like NetSilicon, emWare, e-Device, Lantronix,
     ProSyst, Opto22, domainLogix, and Echelon as current or potential partners.
     We believe that the current focus of these embedded networking companies is
     primarily on Internet-enabling devices, which complements our focus on
     managing device data remotely via distributed, enterprise-class solutions.
     However, in the future these companies may choose to directly compete with
     us.

..     Industrial Automation Products--There are a number of automation products
     available worldwide from vendors large and small that are used to monitor
     and control machines and devices. Some of these PC-based HMI/SCADA software
     companies have focused on extending their business upward to Web-based
     access and enterprise application integration typically to support
     e-manufacturing. Today these companies compete directly with our Axeda
     Supervisor product. Over time we could see these companies as competitors
     in the full DRM market. These companies include WonderWare, Intellution,
     Indusoft, Afcon, Iconics, IndX, Rockwell Automation, Siemens and GE Fanuc.

..      e-Business Platforms--We see the large CRM companies, network management
     vendors and e-business technology platform providers such as Siebel
     Systems, Oracle, IBM, SAP, BEA, PeopleSoft, Sun Microsystems, Hewlett
     Packard, and Computer Associates as both potential competitors and
     partners. These companies have an interest in device networking and
     pervasive computing technologies and could choose to extend their offering
     into DRM. Building on well-understood and widely available standard
     infrastructure components, such as J2EE(R) application servers and
     relational databases, enables us to interoperate with and to take advantage
     of partnering opportunities with these suppliers as well as their
     application and systems integration partners. Axeda is a Siebel Software
     Partner and our Axeda Integrator(TM)for Siebel provides seamless
     integration with the Siebel 2000 Field Service application from Siebel
     Systems Inc. However, in the future these companies may choose to compete
     directly with us.

We may not be able to keep pace with technological advances

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                               AXEDA SYSTEMS INC.

The process of remotely extracting information from intelligent devices will
likely be characterized by rapid technological change, frequent new product
introductions and emerging industry standards. We also expect that the rapid
evolution of Internet-based applications and standards, as well as general
technology trends such as changes in or introductions of operating systems, will
require us to adapt our products to remain competitive. Our products could
become obsolete and unmarketable if we are unable to quickly adapt to new
technologies or standards.

To be successful, we will need to develop and introduce new products and product
enhancements that respond to technological changes, evolving industry standards
and other market changes and developments in a timely manner and on a
cost-effective basis. Although we plan to continue to spend substantial amounts
on research and development in the future, we cannot assure you that we will
develop new products and product enhancements successfully or that our products
will achieve broad market acceptance. Our failure to respond in a timely and
cost-effective manner to new and evolving technologies and other market changes
and developments could adversely impact our business.

Our sales cycle for DRM products is long and may be seasonal and we may rely on
large contracts from relatively few DRM customers

Our software license revenues may result from a relatively small number of
sales, some of which generate disproportionately large revenues. In addition,
our sales cycle is lengthy. Sales of our products may be subject to seasonality.
These sales typically involve significant capital investment decisions by
prospective customers, as well as a significant amount of time to educate them
as to the benefits of our products. As a result, before purchasing our products,
companies spend a substantial amount of time performing internal reviews and
obtaining capital expenditure approvals. It may take up to six to nine months or
more from the time we first contact a prospective customer before receiving an
initial order.

We are dependent upon our key management for our future success, and few of our
key personnel are obligated to stay with us

Our success depends on the efforts and abilities of our senior management and
certain other key personnel. Many of our key employees are employed at will. Our
business could be harmed if any of these or other key employees left or was
seriously injured and unable to work and we were unable to find a qualified
replacement. We have recently hired new managers and may hire key management
personnel as needed. We may not be able to successfully assimilate our recently
hired managers or to hire qualified key management personnel to replace them.

We may not be able to hire and retain qualified employees, which would impair
our ability to grow

Hiring qualified personnel, particularly sales, marketing, engineering and
product management personnel, is very competitive in our industry due to the
limited number of people available with the necessary technical skills and
understanding of the industry. In addition, most of our United States operations
are conducted through our offices in Malvern, Pennsylvania and Mansfield,
Massachusetts. We have in the past and expect in the future to face difficulties
locating qualified personnel in these locations.

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                               AXEDA SYSTEMS INC.

Our success depends upon the successful expansion of our sales force

The expansion of our direct sales force and indirect distribution channels will
be difficult, will take time and will be costly. Our growth could be limited if
we fail to achieve this expansion. We need to expand our direct sales force in
order to significantly increase market awareness of our DRM products and to
generate increased revenues. New sales personnel will require training and it
will take time for them to achieve full productivity. There is strong
competition for qualified sales personnel in our business, and we may not be
able to attract and retain a sufficient number of new sales personnel to expand
our operations. Our sales and marketing expenses may increase as a percentage of
revenues while we expand our direct sales force. Unless this expansion results
in a proportionate increase in revenues, our margins and business may be
adversely affected.

We may not achieve future growth if we are unable to expand our indirect
distribution sales channels

We believe that our future success is dependent upon the expansion of indirect
distribution channels, consisting of relationships with independent software
vendors, software distributors and system integrators. We currently have
relationships with only a limited number of these indirect distribution
channels. Nevertheless, we have derived, and we anticipate that we will continue
to derive, a significant portion of our revenues from these relationships.

Our future growth will be limited if:

..    we fail to work effectively with indirect distribution channels;

..    we fail to increase the number of indirect distribution channels with .
     which we have relationships;

..    the business of one or more of our indirect distribution channels fails; or

..    there is a decrease in the willingness and ability of our indirect
     distribution channels to devote sufficient resources and efforts to
     marketing and supporting our products.

If any of these circumstances occurs, we will have to devote substantially more
resources to the sales, marketing, distribution, implementation and support of
our products than we otherwise would, and our own efforts may not be as
effective as those of our indirect distribution channels.

We rely upon technology licensed from third parties, and if we do not maintain
these license arrangements, we may experience delays until replacement
technology is licensed and integrated

We license technology that is used in our products from third parties under
agreements and we may not be able to maintain these license arrangements. This
technology may not continue to be available on commercially reasonable terms, if
at all, and would be difficult to replace. The loss of any of these technology
licenses could result in delays until replacement technology is licensed and
integrated. In addition, any defects in this licensed technology could prevent
the implementation or impair the functionality of our products, delay new
product introductions or injure our reputation. If we are required to enter into
license agreements with third parties for replacement technology, we could be
subject to higher royalty payments.

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                               AXEDA SYSTEMS INC.

Our business model depends upon licensing our intellectual property, and if we
fail to protect our proprietary rights, our business could be harmed

Our ability to compete depends substantially upon our internally developed
technology. We have a program for securing and protecting rights in patentable
inventions, trademarks, trade secrets and copyrightable materials. However,
there can be no assurance that we have taken or will take all necessary steps to
protect our intellectual property rights. If we are not successful in protecting
our intellectual property, our business could be substantially harmed.

Our pending patents may never be issued, and even if issued, may provide us with
little protection

We regard the protection of patentable inventions as important to our business.
We currently have five U. S. patent applications pending relating to our DRM
business and three patent applications pending internationally. It is possible
that:

..    our pending patent applications may not result in the issuance of patents;

..    our patents may not be broad enough to protect our proprietary rights;

..    any issued patent could be successfully challenged by one or more third
     parties, which could result in our loss of the right to prevent others from
     exploiting the inventions claimed in those patents;

..    current and future competitors may independently develop similar
     technology, duplicate our products or design around any of our patents; and

..    effective patent protection, if any, may not be available in every country
     in which we do business.

We rely upon trademarks, copyrights and trade secrets to protect our proprietary
rights, which are only of limited value

We rely on a combination of laws, such as copyright, trademark and trade secret
laws, and contractual restrictions, such as confidentiality agreements and
licenses, to establish and protect our proprietary rights. Despite any
precautions which we have taken:

..    laws and contractual restrictions may not be sufficient to prevent
     misappropriation of our technology or deter others from developing similar
     technologies;

..    other companies may claim common law or other trademark rights based upon
     state or foreign law which precede our registration or use of such marks;

..    Current federal laws that prohibit software copying provide only limited
     protection from software pirates, and effective trademark, copyright and
     trade secret protection may be unavailable or limited in certain foreign
     countries;

..    companies we acquire may not have taken similar precautions to protect
     their proprietary

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<PAGE>

                               AXEDA SYSTEMS INC.

     rights;

..    policing unauthorized use of our products and trademarks is difficult,
     expensive and time-consuming and we are unable to determine the extent to
     which piracy of our products and trademarks may occur, particularly
     overseas;

..    certain of our products are licensed under shrink-wrap license agreements
     that are not signed by licensees and therefore may not be binding under the
     laws of certain jurisdictions; and

..    tamper-resistant copy protection codes in our software may not be
     successful in preventing unauthorized use of our software.

The laws of other countries in which we market our products might offer little
or no effective protection of our proprietary technology. Reverse engineering,
unauthorized copying or other misappropriation of our proprietary technology
could enable third parties to benefit from our technology without paying us for
it, which could significantly harm our business.

Any failure to adequately protect our proprietary rights could result in our
competitors offering similar products, potentially resulting in the loss of some
of our competitive advantage and a decrease in our revenue. Infringement claims
and lawsuits would likely be expensive to resolve and would require management's
time and resources and, therefore, could harm our business.

We may be subject to product returns, product liability claims and reduced sales
because of defects in our products

Our products are very complex and may contain undetected errors that could harm
our reputation, result in product liability or decrease market acceptance of our
products. The likelihood of errors is higher when a new product is introduced or
when new versions or enhancements are released. Our products are integrated with
our customers' networks and software applications. Errors may also arise as a
result of defects in the products and systems into which our products are
incorporated. We are unable to test our products in each of the applications in
which they are designed to work. It is possible that defects could cause our
customers to experience network or application failures. We have an extensive
quality assurance process in place and procedures to handle customer complaints
and deliver bug fixes. Despite our quality assurance process and that of our
customers, defects and errors may be found in new products or in new versions or
enhancements of existing products after commercial shipment has begun. We may be
required to devote significant financial resources and personnel to correct any
defects. Known or unknown errors or defects that affect the operation of our
products could result in the following, any of which could harm our business:

..    delay or loss of revenues;

..    although we have not lost a customer due to defects, it is foreseeable that
     a customer could cancel a contract due to defects;

..    diversion of development resources;

..    increased product development costs;

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<PAGE>

                               AXEDA SYSTEMS INC.

..    damage to our reputation;

..    delay or diminish market acceptance of our products;

..    increased service and warranty costs; and

..    litigation costs.

Although some of our licenses with customers contain provisions designed to
limit our exposure to potential product liability claims, these contractual
limitations on liability may not be enforceable. In addition, our product
liability insurance may not be adequate to cover our losses in the event of a
product liability claim resulting from defects in our products and may not be
available to us in the future.

We have received notices of claims and might become involved in litigation over
proprietary rights, which could be costly and time consuming

Substantial litigation regarding intellectual property rights exists in our
industry. There is a risk that third-parties, including current and potential
competitors and current developers of our intellectual property, will claim that
our products, or our customers' products, infringe on their intellectual
property rights or that we have misappropriated their intellectual property.
Software, business processes and other property rights in our industry might be
increasingly subject to third-party infringement claims as the number of
competitors grows and the functionality of products in different industry
segments overlaps. Other parties might currently have, or might eventually be
issued, patents that infringe on the proprietary rights we use. Any of these
third parties might make a claim of infringement against us.

We have received notices of claims, and may receive additional notices of claims
in the future, regarding the alleged infringement of third parties' intellectual
property rights that may result in restrictions or prohibitions on the sale of
our products and cause us to pay license fees and damages.

Some third parties claim to hold patents covering various aspects of DTV, HDTV
and DVD technology incorporated into our and our customers' digital media
products and have claimed that various aspects of DTV, HDTV and DVD technology
incorporated into our and our customers' digital media products infringe upon
patents held by them, including the following:

..    Our digital video stream management solutions comply with industry DVD
     specifications, which incorporate technology known as MPEG-2 that governs
     the process of storing a video input in digital form. We have received
     notice from two of our largest customers that a third party with a history
     of litigating its proprietary rights and which has substantial financial
     resources has alleged that aspects of MPEG-2 technology infringe upon
     patents held by the third party. These customers may in the future seek
     compensation or indemnification from us arising out of the third party
     claims and we may be required to agree to indemnify them to secure future
     business or otherwise.

..    A group of companies has formed a consortium known as MPEG-LA to enforce
     the proprietary rights of other holders of patents covering essential
     aspects of MPEG-2 technology that are incorporated into our products.
     MPEG-LA has notified us, as well as a

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<PAGE>

                               AXEDA SYSTEMS INC.

     number of PC manufacturers, including our customers, that the distribution
     of products that incorporate the MPEG-2 technology infringes patents owned
     by members of the consortium. MPEG-LA has requested that these PC
     manufacturers pay license fees for the use of the technology covered by
     MPEG-LA patents.

..    Another group of companies has formed a consortium known as DVD6C (formerly
     DVD Patent License Program) to enforce the proprietary rights of other
     holders of patents covering essential aspects of DVD technology that are
     incorporated into our products. DVD6C has notified us, as well as a number
     of PC manufacturers and other companies manufacturing or licensing
     DVD-related products, including our customers, that products that
     incorporate the DVD technology infringe patents owned by members of the
     consortium. DVD6C has requested that we as well as these PC manufacturers
     pay license fees for using the DVD6C patents.

..    A third party has notified us, as well as two of our customers, that
     parental control features of our CineMaster products infringe patents held
     by the third party.

..    Another consortium of companies, commonly known as 3C, notified a number of
     DVD product manufacturers that the members of the consortium hold patents
     that are essential to DVD technology, and have requested that such
     companies pay license royalties for the use of the technology covered by
     the 3C patents.

..    A letter dated September 12, 2000 from a third party to one of our
     customers who distributes our product claims infringement of a Japanese
     utility model patent regarding Internet terminals which can be coupled to a
     television set. This third party is seeking a license agreement as a
     resolution. We have requested more time to respond and are accumulating
     prior art to invalidate the utility model patent.

..    A third party has asserted that some of our products infringe one or more
     of such third party's patents in the field of all format decoders. The
     third party has stated that it was prepared to license the relevant patents
     to us on favorable terms. We have been in discussions with such third
     party. The third party may seek compensation from us related to this
     matter. We do not know if this party has contacted any of our customers
     regarding this matter. If so, our customers may in the future seek
     compensation or indemnification from us arising out of the third party's
     claims. No claim for such payments has been made to date. We have not
     determined whether and to what extent that the patents held by the third
     party are valid and whether and to what extent our products are covered by
     their patents.

We may be liable to some of our customers for damages that they incur in
connection with intellectual property claims. Some of our license agreements,
including many of the agreements we have entered into with our large PC OEM
customers, contain warranties of non-infringement and commitments to indemnify
our customers against liability arising from infringement of third-party
intellectual property, which may include third-party intellectual property such
as the patents held by members of MPEG LA, DVD6C, 3C and others. These
commitments may require us to indemnify or pay damages to our customers for all
or a portion of any license fees or other damages, including attorneys' fees,
they are required to pay or agree to pay these or other third parties. We have
received notices asserting rights under the indemnification provisions and
warranty provisions of our license agreements from several customers, including
Dell and Gateway.

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                               AXEDA SYSTEMS INC.

We may be required to pay substantial damages and may be restricted or
prohibited from selling our digital media products if it is proven that we
violate the intellectual property rights of others. If MPEG LA, DVD6C, 3C, or
any other third party proves that our digital media technology infringes its
proprietary rights, we may be required to pay substantial damages for past
infringement.

In addition to the claims described above, we may receive notices of claims of
infringement of other parties' proprietary rights. The defense of infringement
claims and lawsuits, regardless of their outcome, would likely be expensive to
resolve and could require a significant portion of management's time. We cannot
assume that we will prevail in intellectual property disputes regarding
infringement, misappropriation or other disputes. Litigation in which we are
accused of infringement or misappropriation might cause a delay in the
introduction of new products, require us to develop non-infringing technology,
require us to enter into royalty or license agreements, which might not be
available on acceptable terms, or at all, or require us to pay substantial
damages, including triple damages if we are held to have willfully infringed a
third party's intellectual property. If a successful claim of infringement was
made against us and we could not develop non-infringing technology or license
the infringed or similar technology on a timely and cost-effective basis, our
business could be significantly harmed.

In addition, rather than litigating an infringement matter, we may determine
that it is in our best interests to settle the matter. The terms of a settlement
may include the payment of damages and our agreement to license technology in
exchange for a license fee and ongoing royalties. These fees may be substantial.
If we are forced to take any of the actions described above, defend against any
claims from third parties or pay any license fees or damages, our business could
be harmed.

We face risks associated with the search for strategic alternatives for our
digital media business

We are seeking strategic alternatives for our digital media business. The
internal and external changes that have and will result from our announcement
concerning the search for strategic alternatives for our digital media business
may disrupt our employees, partners, distributors, stockholders and customers
and may create a prolonged period of uncertainty, which could have a material
adverse effect on our digital media business, prospects and financial condition.
If we continue to operate our digital media business, we will continue to face
risks, including:

..    our digital media business significantly depends upon our CineMaster
     products, and it is uncertain whether the market will continue to accept
     these products;

..    the loss of a single customer could significantly harm our digital media
     business because a majority of our revenues is derived from a small number
     of customers;

..    since most of our revenues are derived from a small number of customers,
     problems those customers experience will directly impact our business;

..    since our customers have not executed long-term contracts with us, our
     revenues could decline significantly with little or no notice;

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                               AXEDA SYSTEMS INC.

..    our revenues are dependent upon acceptance of products that incorporate our
     technology only in the PC industry;

..    we rely on the PC industry, which has risks and uncertainties that are
     beyond our control;

..    we are subject to a non-competition agreement and other contractual
     arrangements prohibiting us from selling products in significant aspects of
     the CE market;

..    we currently depend upon demand for digital entertainment products, which
     may not be sustained;

..    increasing competition may cause our prices to decline, which would harm
     our operating results;

..    competition in the digital media market is likely to continue to increase
     and could harm our business;

..    if we fail to manage technological change in the digital media business,
     respond to evolving industry standards or enhance our digital media
     products' interoperability with the products of our customers, demand for
     our digital media products will decrease and our digital media business
     will suffer;

..    we may not be able to respond to rapidly changing consumer preferences in
     the digital media market;

..    we may be restricted or prohibited from selling our products and/or may be
     required to pay license fees or royalties on future sales of our digital
     media products if it is proven that we violate the intellectual property
     rights of others; and

..    delays in providing our digital media products to our customers may affect
     how much business we receive.

It may be difficult to raise needed capital in the future, which could
significantly harm our business

We may require substantial additional capital to finance our future growth and
fund our ongoing research and development activities beyond 2002. Our capital
requirements will depend on many factors, including:

..    acceptance of and demand for our products;

..    the number and timing of acquisitions and the cost of such acquisitions;

..    the costs of developing new products;

..    the costs associated with our expansion; and

..    the extent to which we invest in new technology and research and
     development projects.

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                               AXEDA SYSTEMS INC.

Although our current business plan does not foresee the need for further
financing to fund our operations for the next two years, due to risks and
uncertainties in the market place as well as a potential of pursuing further
acquisitions, we may need to raise additional capital. Additionally, to the
extent that the proceeds from the dispositions of our CE and IA assets are
exhausted, and if our existing sources of cash and cash flow from operations, if
any, are insufficient to fund our activities, we may need to raise additional
funds. If we issue additional stock to raise capital, your percentage ownership
in Axeda would be reduced. Additional financing may not be available when needed
and, if such financing is available, it may not be available on terms favorable
to us.

Uncertainties exist regarding our stock repurchase program

On September 27, 2001, we announced that our Board of Directors had approved the
repurchase of up to $10 million worth of our outstanding shares of common stock.
We indicated that we expected to complete these purchases over the next 12
months. Stock repurchase activities are subject to certain pricing restrictions,
stock market forces, management discretion and various regulatory requirements.
As a result, there can be no assurance as to the timing and/or amount of shares
that we may repurchase under this stock repurchase program.

Stock-based compensation will negatively affect our operating results

We have recorded deferred compensation in connection with the grant of stock
options to employees where the option exercise price is less than the estimated
fair value of the underlying shares of common stock as determined for financial
reporting purposes. We have recorded deferred compensation, net of forfeitures,
within stockholders' equity of $2.4 million at March 31, 2002, which is being
amortized over the vesting period of the related stock options, ranging from one
to four years. A balance of $1.2 million remains at March 31, 2002 and will be
amortized as follows: $0.6 million in 2002; $0.5 million in 2003; and $0.1
million in 2004.

The amount of stock-based compensation in future periods will increase if we
grant stock options where the exercise price is less than the quoted market
price of the underlying shares or if we modify the terms of existing stock
options. The amount of stock-based compensation amortization in future periods
could decrease if options for which accrued, but unvested deferred compensation
has been recorded, are forfeited.

Our business is subject to risks from international operations such as legal
uncertainty, tariffs and trade barriers and political and economic instability

We conduct business in a number of different countries. We sell products in
several countries outside the United States, including Israel, France, Holland,
the United Kingdom, Latin America and all of Asia. Our operations outside the
United States include facilities located in Israel, France, Holland, the United
Kingdom and Japan. For the quarter ended March 31, 2002, we derived
approximately 55% of our revenues, respectively, from sales to foreign
companies. We anticipate that revenues from international operations will
continue to represent a significant portion of our revenues. As a result, we are
subject to risks associated with selling and operating in foreign countries. For
example, some of our contracts with foreign customers are denominated in foreign
currencies. We do not currently hedge against the risk of such transactions and
as a result, we face a risk of loss related to possible fluctuations in currency
exchange rates.

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                               AXEDA SYSTEMS INC.

Our geographic diversity requires significant management attention and financial
resources. We intend to expand our international operations in the future.
Significant management attention and financial resources are needed to develop
our international sales, support and distribution channels. We may not be able
to maintain international market demand for our products. Our business could be
adversely impacted if we are unable to successfully launch our DRM products into
our international operations.

Additional risks related to selling and operating in foreign countries include,
among others:

.. legal uncertainty regarding liability;

.. language barriers in business discussions;

.. cultural differences in the negotiation of contracts and conflict resolution;

.. time zone differences;

.. reduced protection for intellectual property rights in some countries;

.. differing labor regulations;

.. tariffs, trade barriers and other regulatory barriers;

.. problems in collecting accounts receivable;

.. political and economic instability;

.. changes in diplomatic and trade relationships;

.. seasonal reductions in business activity;

.. potentially adverse tax consequences;

.. changes in a country's or region's political or economic conditions;

.. complexity and unexpected changes in local laws and regulations;

.. greater difficulty in staffing and managing foreign operations; and

.. increased financial accounting and reporting burdens and complexities.

We are subject to risks associated with doing business in the State of Israel

Conditions in Israel may affect our operations. Our subsidiary Axeda Systems,
Ltd. (formerly eMation, Ltd.) is incorporated in Israel. We have an office and
approximately 29 employees in Israel and approximately 2% of our sales for the
quarter ended March 31, 2002 were made to customers in Israel. Our Axeda
Supervisor products (formerly known as WizFactory), are developed in Israel.

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                               AXEDA SYSTEMS INC.

We are directly influenced by the political, economic, and military conditions
affecting Israel and the Middle East. Therefore, any major hostilities involving
Israel or the interruption or curtailment of trade between Israel and its
present trading partners could have a material adverse effect on our operations.

We are subject to conditions attached to governmental grants we have received

In the past, eMation was the beneficiary of certain governmental grants from
government agencies in Israel to encourage development and marketing of
technology under certain conditions. We do not expect to apply for additional
grants in the future of this nature. Through March 31, 2002, eMation received
grants from the Office of the Chief Scientist in the aggregate amount of $1.8
million and paid royalties in the aggregate amount of $1.4 million. As of March
31, 2002, $0.04 million of the remaining potential $0.4 million of principal
liability is accrued in other current liabilities. eMation is obligated to pay
royalties of 3.0% to 3.5% of revenues derived from sales of products funded
through grants received from the Office of the Chief Scientist. The terms of the
Office of the Chief Scientist grants require that eMation manufacture its
products that are developed with such grants in Israel. In addition, eMation may
not transfer the technology developed pursuant to the terms of these grants to
third parties without the prior approval of a governmental committee.
Additionally, through March 31, 2002 eMation received grants from the Israeli
Government through the Fund for the Encouragement of Marketing Activities in the
aggregate amount of $1.2 million and paid royalties in the aggregate amount of
$0.5 million. As of March 31, 2002, $0.6 million of the remaining potential $0.9
million of principal liability is accrued in other current liabilities. eMation
is obligated to pay royalties of 4.0% of revenues derived from sales of products
which result from grants received through the Fund for the Encouragement of
Marketing Activities.

We face risks from the uncertainties of any future governmental regulation

Many of the industries in which our products are used are subject to U.S. and
foreign governmental regulation. We are not currently subject to direct
regulation by any domestic or foreign governmental agency (excluding regulation
by governmental agencies in Israel that have provided grants to us), other than
regulations applicable to businesses generally. However, it is possible that
future laws and regulations may be adopted that regulate our products and the
industries in which they are sold. Our business could be harmed by any new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to our products and the industries
in which they are sold.

Because of their significant stock ownership, our officers and directors can
exert significant control over our future direction

As of March 31, 2002, our executive officers, directors and entities affiliated
with them, in the aggregate, beneficially owned approximately 5.9 million
shares, or approximately 22% of our outstanding common stock. These
stockholders, if acting together, would be able to significantly influence all
matters requiring approval by our stockholders, including the election of
directors, the approval of mergers or other business combination transactions or
a sale of all or substantially all of our assets.

Certain provisions of our certificate of incorporation and by-laws make changes
of control

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                               AXEDA SYSTEMS INC.

difficult even if they would be beneficial to our stockholders

The board of directors has the authority without any further vote or action on
the part of our stockholders to issue up to 5,000,000 shares of preferred stock
and to determine the price, rights, preferences, privileges and restrictions of
the preferred stock. This preferred stock, if it is ever issued, may have
preference over and harm the rights of the holders of our common stock. Although
the issuance of this preferred stock will provide us with flexibility in
connection with possible acquisitions and other corporate purposes, this
issuance may make it more difficult for a third party to acquire a majority of
our outstanding voting stock. We currently have no plans to issue preferred
stock.

Our certificate of incorporation and by-laws include provisions that may have
the effect of deterring an unsolicited offer to purchase our stock. These
provisions, coupled with the provisions of the Delaware General Corporation Law,
may delay or impede a merger, tender offer or proxy contest involving us.
Furthermore, our board of directors is divided into three classes, only one of
which is elected each year. Directors are only capable of being removed by the
affirmative vote of 66 2/3% or greater of all classes of voting stock. These
factors may further delay or prevent a change of control.

Our business and future operating results are subject to a broad range of
uncertainties arising out of the recent terrorist attacks on the United States

Our business and operating results are subject to uncertainties arising out of
the September 11, 2001 terrorist attacks in New York City and Washington, D.C.
These uncertainties include the economic consequences of military action or
additional terrorist activities. Any similar activity of this nature or even
rumors of such activity in the future could harm our operating results and stock
price.

We face risks associated with government regulation of and legal uncertainties
regarding e-commerce and the use of the Internet

As of March 31, 2002, there were few laws or regulations, at either the state or
federal level, directed specifically at e-commerce. Despite the scarcity of laws
targeted at e-commerce, courts and administrative agencies have shown an
increased willingness to apply traditional legal doctrines to cyberspace in
areas including copyright, trade secrets, unfair competition, consumer
protection, monopolies, and unfair trade practices, creating an aura of
uncertainty regarding the legality of certain practices. Because of the
Internet's popularity and increasing use, as well as the sometimes imperfect fit
of traditional legal doctrines to Internet-related issues, new laws and
regulations may be adopted. These laws and regulations may cover issues such as
pricing, content, copyrights, distribution and quality of goods and services.
The enactment of any additional laws or regulations may impede the growth of the
Internet, which could decrease the revenue of our customers and our partner
companies and place additional financial burdens on our business and the
businesses of our customers and our partner companies.

Laws and regulations directly applicable to e-commerce or Internet
communications are becoming more prevalent. For example, the United States
Congress recently enacted laws regarding online copyright infringement. Although
these and other laws may not have a direct adverse effect on our business or
those of our partner companies, they add to the legal and regulatory uncertainty
faced by Internet commerce and e-commerce companies.

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                               AXEDA SYSTEMS INC.

In 1998, the U.S. federal government enacted legislation prohibiting states or
other local authorities from imposing new taxes on Internet commerce for a
period of three years. This tax moratorium was extended by Congress in November
2001 and extends through November 2003. Even with the moratorium reenacted, it
would not prohibit states or the Internal Revenue Service from collecting taxes
that are due under existing tax rules.

One or more states or any foreign country may seek to impose tax collection or
record keeping obligations on companies such as ours that engage in or
facilitate online commerce. Several proposals have been made at the state and
local level that would impose additional taxes on the sale of goods and services
through the Internet. These proposals, if adopted, could substantially impair
the growth of e-commerce, and could diminish our opportunity to derive financial
benefit from our activities. A successful assertion by one or more states or any
foreign country that we should collect taxes on activities related to sales or
use of our products would harm our business.

Our business is subject to changes in financial accounting standards, which may
affect our reported revenue, or the way we conduct business

We prepare our financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP"). GAAP are subject to
interpretation by the Financial Accounting Standards Board, the American
Institute of Certified Public Accountants ("AICPA"), the SEC and various bodies
appointed by these organizations to interpret existing rules and create new
accounting policies. In particular, a task force of the Accounting Standards
Executive Committee, a subgroup of the AICPA, meets on a quarterly basis to
review various issues arising under the existing software revenue recognition
rules, and interpretations of these rules. Additional interpretations issued by
the task force may have an adverse effect on how we report revenue or on the way
we conduct our business in the future.

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                               AXEDA SYSTEMS INC.

PART II: OTHER INFORMATION

ITEM 1:  LEGAL PROCEEDINGS

Between February and April 2000, eleven class action lawsuits were filed against
certain of our current and former officers and directors and us in the United
States District Court for the Eastern District of Pennsylvania. On May 25, 2000,
the cases were consolidated under Civil Action No. 00-CV-1014, and entitled "In
re RAVISENT Technologies Inc. Securities Litigation." Pursuant to the court's
consolidation order, a consolidated and amended class action complaint was filed
on June 14, 2000 with an alleged class period of July 15, 1999 through April 27,
2000. This complaint alleges violations of the federal securities laws,
specifically Sections 11 and 15 of the Securities Exchange Act of 1933, Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5
promulgated thereunder and seeks unspecified damages on behalf of a purported
class of purchasers of our stock during the period stated above. On July 3,
2000, we filed a motion to dismiss the consolidated and amended class action
complaint. The motion is presently fully briefed and the parties are waiting for
a hearing date to be set for the motion. Certain of our employees and certain
holders of 5% or more of Axeda common stock are members of the putative classes
alleged in these actions and therefore may have interests adverse to us with
respect to the alleged claims in these actions. We believe that such lawsuits or
claims are without merit and that we have meritorious defenses to the actions.
We plan to vigorously defend the litigation. However, failure to successfully
defend these actions could substantially harm our results of operations,
liquidity and financial condition.

On November 27, 2001, a putative shareholder class action was filed against us,
certain of our officers and directors, and several investment banks that were
underwriters of the Company's initial public offering. The action was filed in
the United States District Court for the Southern District of New York,
purportedly on behalf of investors who purchased the Company's stock between
July 15, 1999 and December 6, 2000. The lawsuit alleges violations of Sections
11, 12(a)(2) and 15 of the Securities Exchange Act of 1933 and Section 10(b) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder
against one or both of the Company and the individual defendants. The claims are
based on allegations that the underwriter defendants agreed to allocate stock in
the Company's July 15, 1999 initial public offering to certain investors in
exchange for excessive and undisclosed commissions and agreements by those
investors to make additional purchases in the aftermarket at pre-determined
prices. Plaintiffs allege that the Prospectus for the Company's initial public
offering was false and misleading in violation of the securities laws because it
did not disclose these arrangements. This lawsuit is part of the massive "IPO
allocation" litigation involving the conduct of underwriters in allocating
shares of successful initial public offerings. The Company believes that more
than one hundred and eighty other companies have been named in more than eight
hundred identical lawsuits that have been filed by some of the same plaintiffs'
law firms. Certain of our employees are members of the putative classes alleged
in these actions and therefore may have interests adverse to us with respect to
the alleged claims in these actions. We believe that such lawsuit and claims are
without merit and that we have meritorious defenses to the actions. We plan to
vigorously defend the litigation. However, failure to successfully defend this
action could substantially harm our results of operations, liquidity and
financial condition.

From time to time, we have received, and expect to continue to receive, notices
of claims of infringement of other parties' proprietary rights and other claims
in the ordinary course of our

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                               AXEDA SYSTEMS INC.

business. See "RISK FACTORS - We have received notices of claims and might
become involved in litigation over proprietary rights, which could be costly and
time consuming."

From time to time, we have received, and expect to continue to receive, notices
of claims of infringement of other parties' proprietary rights and other claims
in the ordinary course of our business. See "RISK FACTORS-- We have received
notices of claims and might become involved in litigation over proprietary
rights, which could be costly and time consuming. "

ITEM 2:  CHANGES IN SECURITIES AND USE OF PROCEEDS

(a)   CHANGES IN SECURITIES: NONE

(b)   DIVIDENDS:

We have never declared or paid any dividends on our common stock. We do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to finance operations and the
expansion of our business. Any future determination to pay cash dividends will
be at the discretion of the board of directors and will be dependent upon our
financial condition, operating results, capital requirements and such other
factors as the board of directors deems relevant. Moreover, pursuant to
agreements with our lender, we are prohibited from declaring or paying dividends
without the prior written consent of the lender. See "Management's Discussion
and Analysis of Financial Condition and Results the of Operations-Liquidity and
Capital Resources."

(c)   USE OF PROCEEDS:

    Not applicable.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

    Not applicable.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    None during the period ending March 31, 2002. Please See Item 5.

ITEM 5: OTHER INFORMATION

          On May 7, 2002 the Company filed a proxy statement for the following
        purposes at its annual meeting of stockholders to be held June 17, 2002:

        1. To elect two directors to serve for a three-year term ending in the
        year 2005 or until their successors are duly elected and qualified;

        2. To approve an amendment to our 1999 Stock Incentive Plan to increase
        the number of shares authorized for issuance over the term of the plan
        (prior to any future automatic

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                               AXEDA SYSTEMS INC.

        increase) by an additional 500,000 shares;

        3. To ratify the appointment of KPMG LLP as our independent auditors for
        the year ending December 31, 2002; and

        4. To transact such other business as may properly come before our
        annual meeting and any adjournment or postponement thereof.

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                               AXEDA SYSTEMS INC.

Item 6: Exhibits and Reports on Form 8-K

  (a) Exhibits

Exhibit                               Exhibit Title
Number
3.5            Bylaws of Axeda Systems Inc., as amended by the Board of
               Directors on February 22, 2002. (1)
3.6*           Certificate of Ownership and Merger of Axeda Systems Inc., a
               Delaware corporation with and into Ravisent Technologies
               Inc., a Delaware corporation, dated as of January 10, 2002.
10.42+*        Employment Agreement, dated January 10, 2002 by and between
               RAVISENT and John Roberts.
10.43+*        Employment Agreement, dated January 2, 2002 by and between
               RAVISENT and Rich McNeal.
+              Compensation plans and arrangements for executives and
               others
*              Filed herewith
(1)            Incorporated by reference to identical numbered exhibit to
               RAVISENT's current report on Form 8-K dated February 25,
               2002 as filed with the Securities and Exchange Commission on
               February 27, 2002.

  (b) The following reports were filed on Form 8K during this period:

        On January 14, 2002 the Company filed a Form 8-K to announce the change
        of its corporate name to Axeda Systems, Inc. and that effective February
        5, 2002 its stock symbol is XEDA on the NSDAQ exchange.

        On February 20, 2002 the Company filed a Form 8-K/A to amend the Form
        8-K filed 12-21-2001 to provide the financial statements of the business
        (eMation Ltd.) acquired as of December 31, 2000 and 1999 and for the
        years ended December 31, 2000, 1999 and 1998.

        On February 27, 2002 the Company filed a Form 8-K to announce the time,
        date and location for its 2002 Annual Meeting of Stockholders as well as
        the record date.

        On March 7, 2002 the Company filed a Form 8-K to furnish information
        pursuant to Regulation FD.

        On March 8, 2002 the Company filed a Form 8-K/A to replace the current
        report on Form 8-K filed March 7, 2002, furnished pursuant to regulation
        FD.

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                               AXEDA SYSTEMS INC.

SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) the Securities Act of
1934, as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Malvern,
Commonwealth of Pennsylvania on this 10th day of May 2002.

May 14, 2002
Axeda Systems Inc.

       /s/ Thomas J. Fogarty
           -----------------
           Thomas J. Fogarty
             Executive Vice President, Chief Financial Officer and Treasurer

65